Stock rebound unlikely this week as debt-ceiling debate heats up

U.S. stocks will be hard-pressed to turn the tide of recent selling this week as political jousting over raising the United States’ debt ceiling intensifies.

Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House of Representatives, could move into what are perceived as safer assets, such as cash.

The benchmark Standard & Poor’s 500 index last week recorded its worst weekly loss in five weeks, dropping 2.1%. The Dow Jones industrial average fell 1.4% and the Nasdaq composite index declined 2.5%.

While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week.

According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index have posted results, with 74% reporting earnings that topped Wall Street estimates. Companies in the index are forecast to show a 6.5% rise in profits over the second quarter of 2010 when all the reports are in.

Economic data on tap for the coming week include several reports on the housing market — June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June. Economic reports over the last month have raised questions about the health of the U.S. recovery.

“The bigger picture is the economy is still a disaster,” said Joe Saluzzi, co-manager of trading at Themis Trading in New Jersey.

Saluzzi said people still are watching earnings for signs growth may be stagnating. Quarterly results are expected this week from Goldman Sachs, Morgan Stanley, Bank of America Corp. and American Express. Also on the calendar are earnings news from technology companies Apple Inc., Microsoft Corp. and Intel Corp.

“Let’s see what all the rest of these guys have. Let’s see if it’s still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal,” Saluzzi said.

But the longer the debt ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to increase.