Betting on a pause
Signs the Fed may soon suspend its interest-rate hiking campaign could help investors during a tough week.
By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - Bets that the Fed is set to pause its interest-rate hiking campaign as soon as June may be the salve that keeps the stock market comfortable during an otherwise tough week for Wall Street.

Such bets were sparked by Ben Bernanke's congressional testimony Thursday, in which the Federal Reserve Chairman hinted that the central bank's 22-month interest-rate hiking campaign could be set for a pause, perhaps following the next policy meeting on May 10.

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That factor, along with some upbeat earnings, helped the major gauges hold near multi-year highs last week despite some serious challenges that are not likely to go away in the week ahead.

They include surging gold prices, a falling dollar, crude oil prices above $70 a barrel, Iran's vow to keep its nuclear program, and Microsoft's weaker-than-expected earnings and forecast.

This week also brings a bevy of heavy-hitting economic reports, including April readings on manufacturing, and employment. (See chart for details).

Due to all the cross currents, the week ahead is going to be "just as choppy as last week," said Barry Hyman, equity strategist at Ehrenkrantz King Nussbaum.

"There are some positives out there, but I just don't see anything dramatically excitable to scream the market higher," said Hyman, "not until we hear from Mr. Bernanke again the following week."

Friday's gross domestic product (GDP) growth report showed the economy rebounded in the first quarter after a tough fourth quarter. But investors will be looking to see how the nation held up in April, the first month of the second quarter.

The Bernanke effect

In his testimony before the Joint Economic Committee, Bernanke said the economy remains strong, despite inflationary pressures like the surge in energy prices, but that growth will likely moderate a bit, perhaps as soon as the second quarter.

As has been the case for months, he said that further interest-rate increases will be dependent on the upcoming economic news, as the central bankers look to the data to "assess the prospects for both growth and inflation." But he also said that even if the Fed doesn't deem the risks as being pretty much balanced, the bankers might pause for one or more meetings anyway.

Fed watchers and traders on the Chicago Board of Trade seemed to take this as a sign that the central bank will boost rates for a 16th consecutive time in May, but could pause at the late June meeting, or at the very latest, at the August meeting.

The Fed funds rate, a short-term overnight bank lending rate, currently stands at 4.75 percent.

"He went a little out of his way to say we'll tighten at the May meeting, and as long as things keep going as we think they will, the odds are pretty good that we won't do anything in June," said Joshua Shapiro, chief economist at money manager Maria Fiorini Ramirez, Inc.

Bernanke's comments also mean stock investors will be able to cheer strong economic news, at least next week, without worrying that it means rate hikes are going to accelerate, said William Hummer, principal at money manager William Hummer.

"The economy can show promise without it sparking worries that the fed will keep going, because Bernanke's essentially said that strong economic news is not going to change the perception," Hummer said.

"I think we'll see good reports overall next week and that should bolster sentiment," he added.

Earnings keep pouring

Approximately two-thirds of the S&P 500 and more than half of the Dow industrials have reported first-quarter earnings, and the results have been bullish.

Earnings are currently on track to grow 13.4 percent versus a year earlier, according to the latest figures from earnings tracker Thomson Financial. That's a blended figure, including both reported and expected results.

Should the number hold up, the first quarter would be the 11th in a row in which S&P earnings gained at least 10 percent, a record not seen in more than ten years.

So far, companies have been beating estimates by about 5 percent, Thomson said, above the historic average.

The strong earnings are adding an extra layer of support to the market, said Hyman. But as is often the case, the anticipation of strong earnings tends to be more of a catalyst for stock gains than the actual numbers.

Microsoft's big earnings miss Friday and the subsequent impact on the broader tech sector that day showed that markets remain vulnerable to selling in the wake of earnings setbacks, Hyman said. That's particularly the case with the Dow near a six-year high and the Nasdaq composite and S&P 500 near five-year highs.

Next week also brings the start of May, a notoriously unpredictable month that also starts what is traditionally the harder six months for stocks. (For more on this, click here).

On the upside, the first half of May tends to be fairly bullish, according to the Stock Trader's Almanac. While the month overall is typically choppy and directionless for the tech-heavy Nasdaq, it can often be fairly positive for the Dow industrials and the S&P 500.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.