Investors look to Fed, earnings for direction next week

By Chuck Mikolajczak

NEW YORK (Reuters) - Investors hoping equities can sustain their recent bounce next week will carefully watch the U.S. Federal Reserve's mid-week policy meeting for signs the central bank may slow the path of interest rate hikes.

The S&P 500 <.SPX> has already fallen as much as 9 percent this year, with stocks battered by concerns over China's slowing economy, plunging oil prices and Fed Vice Chairman Stanley Fischer's comments that he expected about four rate hikes this year.

But investors expect the Fed may soften its tone on interest rates when it concludes a two-day meeting on Wednesday, especially after European Central Bank President Mario Draghi on Thursday raised the prospect of policy easing in March.

 

"The speculation is the message will continue to be dovish from the Federal Reserve and the four rate increases they have been talking about is not realistic, so that is being viewed as a positive" for stocks said Ken Polcari, Director of the NYSE floor division at O'Neil Securities in New York.

Investors will also deal with a flood of corporate earnings reports, with results from big names in a range of sectors that will point to whether the outlook for fourth-quarter earnings was overly pessimistic.

Among the Dow components expected to report are Boeing , McDonald's , 3M Co and United Technologies . Investors will watch these large multinationals for indications of how the strong U.S. dollar is affecting exports and profit margins.

Also due to report is tech bellwether Apple Inc , the biggest U.S. company and the one most widely held by individual investors. It will be closely watched for signs of a decline in iPhone sales after soft sales forecasts from some of its suppliers, which could seal a third straight month of declines for the stock, which has an outsized effect on the broader market.

"We are going to be provided the clearest picture of not just backward looking fourth-quarter earnings, but much, much, much more importantly, guidance," said Peter Kenny, equity market strategist at Kenny & Co LLC, in Denver.

"Guidance is going to be significantly more important in terms of that overall conversation of whether the US economy weathering the global storm."

Names such as Halliburton and Hess Corp will provide some of the first clues of the damage done to earnings in the energy sector. Thomson Reuters data shows earnings are expected to decline a massive 73.3 percent for the group.

Along with energy, declining forecasts for the materials, finance and technology sectors have pushed any expected return to growth in earnings for the S&P 500 off until the second quarter.

"When you start to look at some of the forecasts for earnings growth in 2016, you're not expected to see much in the first quarter or second," said Robert Pavlik, chief market strategist at Boston Private Wealth in New York.

While big profit gains are expected in the latter half of the year, that will depend on consumers increasing their spending and the dollar stabilizing, Pavlik said.

Capping off the week will be the advance reading on fourth quarter gross domestic product. But with expectations for a modest 0.8 percent growth rate confirming views the economy slowed in the fourth quarter, investors are unlikely to be shocked by anything near the estimate.

(Additional reporting by Caroline Valetkevitch; editing by Linda Stern and David Gregorio)