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The March US employment report and other key economic numbers next week could help US stocks resume their recent winning path as long as that data hits the sweet spot: Not strong enough to add to worries about further interest rate hikes, yet not weak enough to cause concern about a recession.
Data on Friday, a market holiday, showed the US economic growth slowdown in the fourth quarter was not as sharp as previously estimated. Reports on the housing market could also draw investors' attention, given the recent sharp gains in homebuilder stocks. Major indices remain well above their 2016 lows, thanks to evidence of a reviving US economy and a sharp rebound in oil prices, even as stocks broke a five-week streak of gains on Thursday, their last trading day before a long holiday weekend.
While the volatility that marked the start of the year has diminished and many strategists have adopted a cautiously optimistic outlook, the market seems to have paused.
The Friday US data showed that even as gross domestic product increased at a 1.4 per cent annual rate instead of the previously reported 1 per cent pace, corporate profits from current production fell $159.6 billion in the fourth quarter.
A catalyst for stocks could come from a rebound in corporate earnings.
Show-me phase
“What we've seen over the past couple of weeks is really just a return to normal,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts. Stocks' next big move will largely depend on earnings, he said. “We're kind of in a show-me phase, and it's got to be earnings.”
US earnings are expected to be down for a third consecutive reporting period, Thomson Reuters data show. Analysts now expect a first-quarter earnings decline of 6.9 per cent — which would be the biggest drop since the third quarter of 2009 — sharply below the 2.3 per cent gain they had been projecting as recently as January 1.
Stabilising oil prices could at least slow the rate at which future earnings estimates fall, McMillan said. Recent weakness in the US dollar could help as well. US multinationals were hit hard by sharp gains in the dollar last year but the dollar index is down 2.6 per cent so far in the first quarter.
What’s ahead
Some early results are trickling in, but the earnings season is still weeks away for the bulk of S&P 500 companies. Next week's economic data could also bolster or hurt the market, depending on how it signals the next step for Federal Reserve policy.
For next Friday's jobs report, a Reuters poll shows nonfarm payrolls expected to have increased by 200,000 jobs in March, which would be below February's gain of 242,000 jobs. Housing data will include pending home sales as well as the S&P/Case-Shiller price index. Next week also marks the end of the quarter, one of the most turbulent in the market's history. The S&P 500 is down just 0.7 per cent for the quarter now, having recovered much of the first few weeks’ steep losses.
- Reuters
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