Stocks rally into earnings season

NEW YORK (CNNMoney.com) -- A worse-than-expected December jobs report last week couldn't derail the economic optimism that's been fueling stock gains for months. But the weeks ahead could prove challenging, as the quarterly reporting period gets underway.

Dow components Alcoa, Intel and JPMorgan Chase all report quarterly results next week. On the economic front, reports are due on retail sales, the trade gap, consumer sentiment and manufacturing.

Late last week the government reported employers cut 85,000 jobs from their payrolls, surprising economists who were forecasting no change. Meanwhile the unemployment rate held steady at 10%, near 26-year highs.

But the stock market showed little reaction, managing to end the first trading week of 2010 in positive territory. The Dow industrials and S&P 500 now stand at 15 month highs and the Nasdaq composite is at a 16-month high.

Whether the market can sustain and build on last year's gains will depend on employment, corporate profits and whether the consumer can pick up the slack when the government stimulus runs out, said Brett Hammond, chief investment strategist at TIAA-CREF.

"Most companies have cut costs but they haven't grown revenue yet," Hammond said. "The question is whether corporate profits can rise in a time when American consumers can't step up to the plate."

Eye on earnings: S&P 500 earnings are expected to have jumped 213% in the fourth quarter of 2009, thanks to easy comparisons to an abysmal fourth quarter of 2008, the worst quarter in the history of earnings tracker Thomson Reuters. In that quarter, profits plunged 67% as the crisis in the financial and auto sectors hit a nadir, credit remained frozen and the recession intensified.

But a gain of 213% needs to be taken with a gallon of salt, because it mostly reflects the about face in the financial sector. The sector saw a quarterly loss in the fourth quarter of 2008 that was unprecedented -- so substantial that Thomson isn't fully sure it will be able to measure how much of a jump the sector posted year-over-year in the fourth quarter of 2009.

On Monday after the close, Alcoa (AA, Fortune 500) kicks off the quarterly reporting period, as it traditionally does. The aluminum producer is expected to have earned a profit of 6 cents per share versus a loss of 28 cents a year ago, according to Thomson Reuters forecasts. Alcoa is also expected to report a 15% drop in revenue.

On Thursday after the close, Intel (INTC, Fortune 500) is expected to report a quarterly profit of 30 cents per share versus 4 cents a year ago. The chipmaker is also expected to report a 23% rise in quarterly revenue.

On Friday morning, before the start of trading, JPMorgan Chase (JPM, Fortune 500) is expected to report a profit of 63 cents per share versus 7 cents a year ago. The bank is also expected to report a 57% rise in revenue.

The fact that many of the big banks that helped bring the economy to the brink of disaster are now profiting nicely one year later is a major source of anger and frustration for many investors, particularly since taxpayers helped fund their bailouts.

Next week marks a step toward addressing those concerns and investigating further why the crisis happened, when the Financial Crisis Inquiry Commission holds its first public hearings on Wednesday and Thursday in Washington.

The bipartisan commission will hear testimony from some of the nation's top bank executives including Goldman Sachs' Lloyd Blankfein, Bank of America's Brian Moynihan, Morgan Stanley's John Mack and JPMorgan Chase's Jamie Dimon.

Monday: Federal Reserve Governor Dennis P. Lockhart is speaking in the afternoon.

Tuesday: The November trade balance, from the Commerce Department, is due out before the market opens. The trade gap is expected to have widened to $34.8 billion from $32.9 billion.

Wednesday: The December Treasury budget, due out in the afternoon, is expected to have narrowed to $70.4 billion from $120.3 billion.

Federal Reserve Governor Charles L. Evans is speaking in the afternoon.

The government's weekly crude oil inventories report is also due in the morning. The Fed's "beige book" semi-annual reading on the economy is due in the afternoon.

Thursday: The December retail sales report from the Commerce Department is due in the morning. Sales are expected to have risen 0.4% after rising 1.3% in the previous month. Sales excluding autos are expected to have risen 0.3% after rising 1.2% in November.

November business inventories, due after the start of trading, are expected to hold steady after rising 0.2% in the previous month.

The National Retail Federation issues its holiday sales report, a key measure of chain store sales during the critical November and December period.

Weekly initial jobless claims and December import and export prices are also on tap.

Friday: The Consumer Price Index (CPI) in December is expected to have risen 0.2% after rising 0.4% in November. The so-called Core CPI is expected to have risen 0.1% versus an unchanged reading in the previous month.

The Federal Reserve reports on manufacturing activity in the morning. Industrial production is expected to have risen 0.6% in December after rising 0.8% in November. Capacity utilization isxpected to have risen to 71.8% in December from 71.3% in the previous month.

The University of Michigan's consumer sentiment index for January is expected to have risen to 73.8 in early January from 72.5 in late December.

The Empire Manufacturing survey, a regional manufacturing reading, is also due in the morning.

Federal Reserve Governor Jeffrey M. Lacker speaks Friday afternoon.

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