Home sales and a report on economic growth may help investors decide if they want to keep riding a bull market in stocks, while a torrent of quarterly earnings reports will no doubt cause some anxious moments.
A sharp drop in shares of equipment-maker Caterpillar Inc. on Friday showed just how badly a stock can be hurt when there is an earnings shortfall. The company reported an earnings decline that was greater than expected. The stock fell 4.4 percent and spoiled the Dow's day.
Despite Caterpillar's problems, multinational corporations have been in a position to benefit from stronger economies overseas.
One of the reasons big-cap stocks have done so well is that they have a lot of foreign exposure and that is where profit growth has been coming from, said Bob Schaeffer, portfolio manager at Becker Capital Management in Portland, Oregon. Domestic profitability has been flagging for some time.
In the coming week, earnings are due from the likes of pharmaceutical companies Merck & Co. Inc., Schering-Plough Corp., Eli Lilly and Co. and Bristol-Myers Squibb.
Others on the list include such high-profile names as Boeing Co., Exxon Mobil Corp. and Ford Motor Co.
Although investors have been caught off guard by the occasional earnings disappointment from companies such as Caterpillar and Pfizer Inc., U.S. stock indexes have been reaching new lifetime and closing highs, with the Dow industrials closing above 14,000 for the first time on Thursday.
The Standard & Poor's 500, which earlier in the month finally surpassed its old all-time set in 2000, also ended Thursday at a new closing high.
But worries about earnings shortfalls and subprime mortgages led to Friday's sharp pullback and broke a three-week streak of gains for the three big U.S. stock indexes. The subprime problem is tied to a weak housing sector, where sales have faltered and prices have slumped.
After losing ground on Friday, the Dow Jones industrial average finished the week down 0.4 percent, the Standard & Poor's 500 Index dropped 1.2 percent and the Nasdaq Composite Index declined 0.7 percent.
For the year to date, though, stocks are sharply higher: The Dow is up 11.1 percent, while the S&P 500 is up 8.2 percent and the Nasdaq is up 11.3 percent.
TIME FOR A HOUSING CHECK-UP
The health of the housing sector is due for a check-up in the form of new figures on sales of both new and existing homes.
On Wednesday, the National Association of Realtors will report on sales of existing homes in June. According to the consensus in a Reuters poll of economists, sales fell to a 5.87-million-unit annual rate from 5.99 million in May.
The following day, the Commerce Department issues a report on new home sales. The consensus view is for an annual rate of 895,000 in June, which would be down from 915,000 in May.
The housing sector has been a concern to investors as subprime mortgages sold to less credit-worthy borrowers have experienced rising defaults. Some hedge funds with investments in securities linked to the mortgages have had huge losses.
One of the things that has puzzled us is that with the weakness seen in housing, the jobs picture has remained so strong, said Schaeffer of Becker Capital Management, which has $2.7 billion in assets under management.
Schaeffer said a lot of the jobs created from 2003 to 2006 were associated with a booming housing sector, so for employment to hold up while housing is in a slump seems to be a little bit of a disconnect.
In addition to the report on new home sales on Thursday, other data that day includes durable goods orders. According to the median forecast in the Reuters poll, orders rose 1.8 percent last month after May's revised drop of 2.4 percent.
Schaeffer said while some improvement in durable goods orders is to be expected after the May decline, Caterpillar's problems, in part due to weak sales, could cause expectations to be scaled back somewhat. Durable goods are washing machines, refrigerators and other big-ticket items expected to last three years or more.
Friday will bring the first report on how the U.S. economy did in the second quarter of 2007. A rebound to an annual growth rate of 3.2 percent is forecast after a dismal pace of just 0.7 percent in the first quarter.
A final July reading of consumer sentiment will come out on Friday in a report from the Reuters/University of Michigan Survey of Consumers.
Despite the occasional sharp pullbacks in stocks such as Friday's downturn, some worry that investors are getting too enthusiastic about stocks. This can be seen as a contrary sign that things have gotten out of hand.
The thing that concerns me and what to look for in the relatively near-term is that sentiment has turned fairly dramatically, said Jon Merriman, chief executive of Merriman Curhan Ford & Co., an investment bank in San Francisco. It's gotten quite positive and I hate that.
Merriman noted that the price of oil has climbed well above $70 per barrel.
When they whack the (stock) market, people will be focusing on oil again, he said.
Michael Sheldon, chief market strategist for brokerage Spencer Clarke in New York, suggested that investors keep an eye on the dollar, which is back to making new lows.
He said if the U.S. Dollar Index, a trade-weighted average of six currencies against the U.S. dollar, falls through a key level of 80, it could trigger massive selling and impact financial markets around the world. On Friday, the dollar slid to a record low against the euro, which traded at a peak of $1.3844 earlier in the day.
A weak dollar makes U.S. goods cheaper on world markets and also boosts profits of U.S.-based multinationals.
But a weak dollar also makes foreign goods more expensive in the United States and contributes to inflation. It can also prompt foreign investors to dump U.S. holdings.
(Additional reporting by Jennifer Coogan and Kristina Cooke)