Profit reports take spotlight

Enthusiasm over government programs aimed at breaking a logjam in bank lending has become the key driver of the market’s recent surge. But that could take a back seat in coming weeks as investors return to their bread-and-butter indicator: quarterly earnings data.

Coming off a nearly 12-year low in early March, the Dow Jones industrial average just wrapped up its best four-week run since 1933. A shift from fear to hope has largely been propelled by policy initiatives and some corporate news, such as bank executives saying their businesses were profitable in January and February.

But as investors’ focus shifts, so might momentum. This week they’ll begin poring over first-quarter earnings results to see whether anything has improved. Aluminum producer Alcoa Inc. is set to kick off the first-quarter earnings season on Tuesday with a quarterly loss.

The current rally will last only if companies show some improvement in quarterly results. Disappointing results, especially in key sectors such as banking and retail, probably would kill market momentum.

The banking sector, which has been a culprit in the economic downturn and the focus of so much recent government intervention and support, will be closely monitored.

Investors who cheered executives’ comments last month about their banks’ operating profitably in January and February will want to know whether that performance continued in March. An increase in lending by banks would also provide further evidence that the economy is on the rebound.

Any improvement among retailers’ quarterly earnings also could push a rally. Consumer spending has been anemic during the ongoing recession, and improvement in earnings would be a welcome sign.

Investors will get a glimpse at how retailers are performing this week when March sales reports are released Thursday.

While earnings come into focus, investors will continue to monitor economic data, even though their role in propelling the market has been somewhat muted recently.

One reason lagging economic indicators have become less influential on the market is that investors are already discounting them because they are so often expected to be weak. When they fall close to expectations, investors are often unfazed.

This week a key reading from the Commerce Department on wholesale inventories probably will be the biggest economic driver of trading. Otherwise, few numbers are being reported this week.

The report due Wednesday is expected to show that businesses reduced inventories for a sixth straight month in February, but a better-than-expected result is possible.

“Wholesale inventories will probably show some improvement,” Rubino said. If they do, he said, it might fuel the current market surge.

The Federal Reserve also will release minutes from its March meeting, at which it decided to inject more than $1 trillion into the economy. The Fed’s spending program was another government initiative that helped jump-start the markets last month.

The government plan is part of myriad programs being put in place. The amount of money being pumped into economies worldwide is also providing support against future drops, said Will Muggia, president and chief executive of Westfield Capital Management and co-manager of the Touchstone Mid Cap Growth Fund.

“The amount of stimulus piling up is incredible,” Muggia said. “It’s almost more important than economic data coming out.”

That government support is the reason a rally is more sustainable now than it has been during the ongoing credit crisis and recession, he said

During the week, the Dow gained 3.1%, rising to 8,017.59. The Standard & Poor’s 500 index gained 3.3%, to 842.50. The Nasdaq composite index gained 5%, closing at 1,621.87.

Markets will be closed for the Good Friday holiday.

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At a glance

TUESDAY

Federal Reserve releases consumer credit data for February and posts the minutes from its March meeting.

Quarterly financial results expected from Alcoa Inc.

WEDNESDAY

Commerce Department releases report on February wholesale trade inventories.

THURSDAY

Retailers report monthly sales results.

Labor Department releases report on weekly jobless benefit claims.

Commerce Department releases February international trade data.

Mortgage financing company Freddie Mac releases weekly mortgage rates.

FRIDAY

Treasury releases federal budget for March.

Good Friday. Financial markets are closed.

Source: Associated Press