After the S&P 500's impressive 30 percent return in 2013, Wall Street will get a better picture of reality next week as the pace of companies reporting earnings picks up.
A number of big banks are due to report their quarterly and full-year results next week, including JPMorgan Chase & Co and Wells Fargo & Co on Tuesday, Bank of America Corp on Wednesday, Goldman Sachs Group Inc and Citigroup Inc on Thursday, and Morgan Stanley on Friday.
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Their results will help determine whether earnings forecasts for 2014 need to come down and whether stock values have become overblown.
"There isn't much left to happen to this market, in terms of the view of an expanding economy. It is generally agreed by everyone that the economy is improving. What isn't clear is whether earnings are improving at the same pace the market is. That's the next big test for equities," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
For the first full trading week in January, the Standard & Poor's 500 Index rose 0.6 percent and the Nasdaq Composite Index climbed 1 percent, while the Dow Jones industrial average slipped 0.2 percent.
Investors may get a better sense of how quickly the central bank will reduce its market-friendly bond purchases from a number of Federal Reserve officials due to speak next week. A much weaker-than-expected December payrolls report on Friday raised new questions about both the strength of the economy and the aggressiveness of Fed stimulus.
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Federal Reserve Bank of Atlanta President Dennis Lockhart is scheduled to speak at events on Monday and Wednesday, while Fed Chairman Ben Bernanke is set to speak on Thursday. The Fed's Beige Book is due on Wednesday.
A batch of December data will be released next week, with retail sales on Tuesday, the U.S. Producer Price Index on Wednesday, the U.S. Consumer Price Index on Thursday and housing starts on Friday. Another number to note on Friday will be the preliminary January reading on U.S. consumer sentiment from the Thomson Reuters/University of Michigan Surveys of Consumers.
Healthy Earnings Outlook
For the whole S&P 500, fourth-quarter profit growth is expected to have increased 7.7 percent from a year ago, while revenue is expected to have risen just 0.4 percent, Thomson Reuters data showed. The benchmark S&P 500 rose 9.9 percent in the fourth quarter of last year, while it jumped 29.6 percent for 2013, its best year since 1997.
Among other earnings to watch next week, General Electric Co is expected to report a spike in fourth-quarter profit on Friday with the help of the record $229 billion backlog of orders for jet engines, oil pumps and healthcare equipment. American Express Co's fourth-quarter results on Thursday are expected to beat estimates, helped by increased card spending and lower default rates among customers.
Keeping Retail Options Open
Retail stocks have been attracting increased options activity this week as major retailers came out with their disappointing holiday sales figures.
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Investors will get more insight into the consumers' state of mind next week as about 150 consumer-related companies are due to participate in the annual ICR XChange conference from Monday through Wednesday. The annual gathering comes after many large U.S. retailers slashed their earnings forecasts recently because of steep discounts they offered during the holidays to persuade reluctant consumers to buy.
"I wouldn't judge the health of the economy off of brick-and-mortar retailers," said Paul Zemsky, head of asset allocation at ING Investment Management in New York. "The economy was strengthening into the end of the fourth quarter," and there was sufficient growth to keep earnings growing and people buying the market.
Options volume on Five Below jumped more than six times the norm on Friday. The value retailer's stock fell 7.2 percent to close at $40.46 a day after the company announced disappointing holiday sales. Five Below is expected to present at the ICR XChange conference on Monday.
Out of the total 6,975 options contracts traded on Friday in Five Below, 2,565 were calls and 4,410 were puts with the most activity seen in January $45 calls. Goldman Sachs had recommended buying January $45 calls for a relief rally in the stock following the ICR update.
Domino's Pizza options volume also rose with a total of 861 contracts traded, compared with average daily volume of 520 contracts. The stock has moved about 8.5 percent up or down during the past nine conferences, moving in the positive direction during seven of the nine events, according to Goldman Sachs. The company's presentation at the ICR XChange conference is set for Wednesday.