NEW YORK (CNN/Money) -
The typically skittish summer months are closing in, and unless investors start focusing on the positives soon, stocks are bound to dawdle through the fall.
With all the naysayers prophesying doom and gloom, you'd think the stock market is destined to tumble. But that's not necessarily the case. Sitting on the sidelines are a bunch of good reasons for the market to shape up, if not spring forward. If only the market would notice.
Yes, interest rates are set to rise from their historic more than 40-year lows, the weak U.S. dollar, which has boosted the earnings of multinationals, has bottomed and is recovering, and the daily onslaught of news from Iraq has been devastating. Not to mention, oil prices are near all-time highs and a presidential election win for the market-friendly Republican Party is in question.
However, earnings and economic growth are also tracking higher than previously expected, hiring is finally picking up, investors seem to be slowly coming to terms with higher interest rates, plus, election years are usually good for the market.
"All of these things point to an improving environment for stocks, but the outlook for the year remains flat," said Jeff Kleintop, chief investment strategist for PNC Advisors. "I would think the S&P 500 will trade in a range of about 1,075 to 1,125 until the fourth quarter."
"By the fourth quarter, we'll have better clarity on the presidential election, we'll know more about interest rates, about how the transition of power in Iraq has played out, and hopefully, oil prices will be under control," Kleintop added.
Nervousness surrounding these issues has been and will likely continue to distract investors from a bevy of very positive indications, including earnings. That was certainly true this week, when investors nitpicked through strong results from Walt Disney (Research), Dell (up $0.35 to $40.76, Research) and others and reacted more decisively to the jump in oil prices and two inflationary indicators -- the producer price index and the consumer price index. (For a look at how the market closed the week, click here.)
Analysts say that in the week ahead, stocks are likely oversold from a technical perspective and are likely to bounce off of the recent lows, but through the rest of the summer, it's going to be hard for the market to muster upward momentum.
The week ahead brings reports on manufacturing in the New York and Philadelphia areas, the housing sector and leading economic indicators. Earnings are due from technology names Hewlett-Packard (Research) and Applied Materials (Research) as well as from Home Depot (Research), Lowe's (Research) and other retailers. (For a preview, click here.)
Indifference about earnings?
Earnings growth in the first quarter has been stellar. Although growth is expected to slow in the second and subsequent quarters, due to tough comparisons from a year ago, the slew of positive pre-announcements has shown it won't slow as much as had been previously expected.
A month ago, analysts surveyed by First Call were expecting second-quarter earnings to grow around 14 percent from a year earlier, now they expect growth of around 18 percent, and that's expected to ultimately rise to a range of 20 percent to 24 percent. Earnings in the third and fourth quarters are expected to grow around 15 percent.
"If not for the strong earnings, I think the market would be a lot weaker than it is," said Jon Burnham, portfolio manager at Burnham Securities. "But that's not enough to lift the market out of a trading range. There's just too much uncertainty for markets to move higher."
Burnham thinks the rise in crude oil and gasoline prices is the market's biggest hindrance right now, as it works like a giant tax on everyone, causing higher prices and increasing pressure on the Fed to raise interest rates.
He believes the fear in the market regarding interest rates is not that there will be a few small quarter-point hikes, which would still keep short-term rates near their historic lows, but rather that once the Federal Reserve moves into a tightening period, it may stay in such a mind set for some time.
"Oil prices and interest rates are the twin problems right now," said Ram Kolluri, chief investment officer at GlobalValue Investors. "People are looking at these prices and saying 'how is this going to trickle down through the economy?'"
Worries about this have bothered the stock markets for the past couple of months, and sent the major indexes sharply lower, to new lows for the year, earlier in the week.
Murky summer brewing
In the short term, the period surrounding June 30th could be significant, the analysts say. Two relevant problems get addressed then. The Fed's intentions will become more clear after its policy meeting. Many economists expect the central bank to raise interest rates by a quarter-percentage point at that meeting, if not a half point. It's also the day that is currently set for the transition of power in Iraq.
Once the market gets past that point, some of the psychological hindrances that have been weighing will begin to lift, Kolluri said.
He doesn't expect a big gain, but does expect that markets will pick up in the second half.
Some seasonal factors will be at play as well. The seasonal tendency, both in election years and otherwise, is for summer to be pretty mild. The average June gains for the last 33 years have been 1.2 percent on the Nasdaq, 0.8 percent on the S&P 500 and 0.3 percent on the Dow, according to the Stock Trader's Almanac.
July starts the Nasdaq's worst four months of the year, according to the Almanac, and the month isn't much better for the Dow and the S&P.
Key events in the week ahead
- In a week heavy on retail earnings, Lowe's and Home Depot are the biggest names. On Monday, Lowe's is expected to report a profit of 54 cents a share, up from 53 cents a year earlier, according to Thomson Financial estimates. On Tuesday, Dow company Home Depot is expected to report earnings of 43 cents, versus 39 cents a year ago.
- A pair of closely-watched regional manufacturing reports are due next week. The NY Empire State index for May, due early Monday, is expected to have fallen to 34.8 from 36.1 last month, according to a consensus of economists surveyed by Briefing.com. Thursday's Philadelphia Fed index, due after the start of trading, is expected to have fallen to 31.2 from 32.5 in April.
- Tuesday morning brings a pair of reports on the housing market, expected to show the sector is seeing a bit of a cool down. Housing starts for April are expected to have fallen to an annual rate of 1.988 million units, versus 2.007 million units. Building permits are thought to have fallen to an annual rate of 1.970 million units in May from a 1.976 million unit rate in April.
- After the close Tuesday, chip gear maker Applied Materials is expected to report earnings of 19 cents per share, up from 3 cents a year earlier.
- Also after the close Tuesday, Hewlett-Packard releases its quarterly report. The Dow component is thought to have earned 34 cents a share, versus 29 cents a year earlier.
- Thursday brings the Leading Economic Indicators (LEI) report before the start of trading. LEI is thought to have risen 0.2 percent in May after rising 0.3 percent in April.