A relative calm as earnings loom

Markets have replaced big gains with little change.

Stocks entered a period of relative calm in recent weeks as a powerful spring rally born of optimism about the economy’s revival began to sputter. With the second quarter wrapping up Tuesday and earnings reports looming next month, there appears to be little coming up in this holiday-shortened week that could exert a strong pull on the market one way or the other.

Earnings reports and profit outlooks are sure to dictate market movements in the coming weeks. Some watchers are already worrying that poor news in those reports, which start rolling out in early July, could weigh down a market that had been buoyed by hopeful signs on the economy.

“Over the last couple of weeks, uncertainty has been building in how earnings will play out over the next four weeks,” said David Goerz, chief investment officer at HighMark Capital Management Inc. in San Francisco.

Key employment data due out Thursday is likely to have the biggest effect of any reports set to be released during the week, but even that reaction could be muted because investors are concerned about earnings more than anything else right now, Goerz said.

Earnings will give investors the best insight into whether the economy has actually bottomed and started what is expected to be a slow recovery. The market had reacted favorably to reports of improvement in consumer confidence, housing and manufacturing that suggested the economy’s deterioration was slowing -- now they get a chance to see if that moderation translated into better profits for companies.

Retailers’ results will show whether consumers are heading back to stores and buying new goods. Financial firms’ earnings will let investors know where the battered credit markets stand. And earnings from manufacturers will indicate whether factories are ramping up production.

Investors have become cautious ahead of these reports, which helped put a halt to the market’s big springtime rally that resulted in sharp gains for every sector. The average industry sector-focused equity mutual fund has gained 21.1% since the end of March, according to data compiled by Lipper Inc.

Investors will be even more focused on companies’ forecasts for future growth.

After eight quarters of downward revisions to corporate earnings estimates and declining profits, analysts are starting to predict improvements in profitability for 2010 and beyond as the economy stabilizes and normalizes, Goerz said. Those revisions could provide a new impetus for the market to restart its rally.

Despite the uncertainty and even if earnings are weaker than expected, a sharp drop in stock prices is unlikely, said Craig Hodges, president of Hodges Capital Management in Dallas.

“A lot of managers missed this rally,” Hodges said. “Any sell-offs will be met with buying because their job is to put money to work.”

Before earnings season kicks into high gear, investors will get a smattering of economic data this week, led by the Labor Department’s June unemployment figures.

“It’s probably going to look better than it has the last couple of months,” Goerz said, but the unemployment rate could move higher.

Economists polled by Thomson Reuters predict the unemployment rate rose to 9.6% in June from 9.4% in May.

Aside from the labor data, investors will also get new readings on consumer confidence and manufacturing.

June’s consumer confidence figure, due out Tuesday, is expected to increase to 57 from 54.9, according to economists’ polled by Thomson Reuters.

In manufacturing, economists predict that the Institute for Supply Management’s manufacturing index, due out Wednesday, improved to 44 in June from 42.8 in May.