SAN FRANCISCO (MarketWatch) — U.S. stocks are expected to take a much-needed vacation from their standard catalysts of Europe, the Federal Reserve and Congress and be driven by retail earnings and other economic indicators next week, analysts said.
The summer has been a restful one for U.S. stocks. They’ve turned in a slight gain for the fifth week in a row, with the Dow Jones Industrial Average DJIA+0.32% , S&P 500 Index SPX+0.22% and the Nasdaq Composite Index COMP+0.07% up almost 1% to 2% for the week. Over the past 30 days that’s added up with the indexes gaining 4.4%, 4.8% and 4.1%, respectively.
Also, the lack of any Sturm und Drang this August has had a calming effect on market volatility and volume. Remember last year’s budget-deficit battle and S&P’s U.S. triple-A downgrade? The CBOE Market Volatility Index VIX-3.53% , or so-called “fear index,” has fallen 21% over the past 30 days, or 66% from a year ago, and average August daily stock trading volumes are down 40% from a year ago, according to Barclays.
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With no economic data planned for Monday, Tuesday kicks the week off with the release of July retail-sales numbers, which will be watched closely as an indicator of economic health.
Expect some disappointment there, said Scott Armiger, manager of the $500 million Christiana Trust at Wilmington Savings Fund Society. Reported jobs growth is doing little to support back-to-school shopping, especially with higher gasoline prices cutting into the consumer, who has seen few income gains this year.
“With back-to-school shopping people are dialing it back, and we want to see if that is what’s truly happening,” added Armiger. “Also, $4-a-gallon gas prices are a tipping point for the U.S. consumer.”
The money manager also believes European leaders on vacation and the congressional recess are beneficial for markets. in that they are less likely to harm them. “With nothing coming out of Brussels or Washington, we’ll be looking out for some hiccup like Knight [Capital Group Inc.] KCG-5.54% next week,” Armiger said.
Earnings from various retailers and July retail-sales figures are likely to play off one another in the coming week, according to Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC.
Other data such as the July consumer-price index and the August Empire State index on Wednesday, along with the August Philly Fed on Thursday are also likely to get exceptional play, as we’re not likely “to be held hostage by European officials,” he said.
Target Corp. TGT+0.24% will also report on Wednesday, along with Sears Holdings Corp.SHLD+1.48% on Thursday.
With declining consumer sales in the past few months, retail will be a key focus to Brad Sorensen, Charles Schwab director of market and sector research. Between the retail-sales data on Tuesday and individual company reports, Sorensen said he’ll place more weight on the latter because of their forward-looking focus.
“Retailers are already looking forward to the Christmas season, and globally exposed retailers are seeing how the recession in Europe is affecting them,” he commented.
If Europe doesn’t shatter the relative market calm next week, investors will get a clearer look at how this earnings season has shaped markets, said Eric Marshall, portfolio manager of the Hodges Small Cap Fund.
“We’ll see how the equities market digests this week’s gains,” he added. “Earnings fundamentally came out better than expected. There was a better outlook than was feared, so if we see gains next week it’ll solidify that it was earnings driven.”
So far this earnings season, 447 companies in the S&P 500 have reported and of those 70% have beaten Wall Street consensus earnings estimates, according to John Butters, senior earnings analyst at FactSet.
But what’s more telling is that only 43% of those companies have topped revenue estimates, the lowest rate since the first quarter of 2009, he wrote in a note.
The outlooks look even more grim going into the third quarter. Of 84 S&P 500 companies, 67, or about 80%, have projected they will fall short of Wall Street consensus earnings estimates, Butters said.
Marshall is also focusing on earnings from specialty retailers in the coming week as they exhibit greater sensitivity to the health of consumer discretionary spending.