A heavy slate of U.S. corporate earnings could set the course next week for a wavering U.S. stock market.
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Better-than-expected big bank earnings on Friday somewhat helped shore up Wall Street's confidence, which has been shaken by a rocky beginning to third-quarter reporting season, marred by disappointing results from industrial and healthcare companies.
But with the bulk of results still to come, investors are counting on large U.S. companies to stop a year-long streak of profit declines. Next week's reports include Microsoft, General Electric, Johnson & Johnson and Bank of America.
Mixed initial results have added to other concerns in recent days that hurt equities, including weak economic data in China, worries over Britain's exit from the European Union, and the likelihood of a Federal Reserve interest rate hike before year-end. After a second straight week of losses, the S&P 500 sits about 2.5 percent below its all-time closing high set two months ago.
"The exuberance you saw this summer as it got to new highs was built on the premise that prices were leading a breakout in earnings," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
Investors "were looking for a pretty strong breakout in the second half of the year to make up for a very weak first half, and I just don't know that that's in the cards," McCain said.
With 34 S&P 500 companies reporting so far, third-quarter earnings are expected to slip 0.4 percent, according to Thomson Reuters I/B/E/S.
But given how many better-than-expected reports typically occur, investors are eyeing the quarter to potentially end with earnings in positive territory.
S&P 500 profits fell 5 percent in the first quarter and 2.1 percent in the second. "At the end of the day, it really is all about earnings. Every economic data point filters down into earnings," said Karyn Cavanaugh, senior market strategist at Voya Investment Management in New York.
"When we actually move to positive, I think psychologically that will be a point for investors to say, 'Wow, this really is probably the best place to be in terms of investing. You have to be in equities'," said Cavanaugh.
Strong earnings forecasts will be important for supporting historically expensive stock valuations. The S&P 500 trades at nearly 17 times earnings estimates for the next 12 months, against its historical average of 15 times.
One potential obstacle to upbeat outlooks is the strengthening U.S. dollar, which this week climbed to its highest since March against a basket of currencies .DXY.
Multinational companies that generate business outside the United States stand to see those sales reduced when translated back into dollars.
Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta, said he will be watching "whether or not businesses feel like they have their operating models working well and under control, and if the dollar turns into the excuse du jour for weak guidance or missing the quarter."
"At these valuation levels, the market gets to be vulnerable," Gayle said.
(Reporting by Lewis Krauskopf; Editing by Nick Zieminski)