KEY POINTS:
Home sales and a report on economic growth may help US investors decide if they want to keep riding a bull market in stocks this week, while a torrent of quarterly earnings reports will no doubt cause some anxious moments.
A drop in shares of equipment-maker Caterpillar on
Friday showed just how badly a stock can be hurt when there is an earnings shortfall.
The company reported an earnings decline that was greater than expected. The stock fell 4.4 per cent and spoiled the Dow's day.
Despite Caterpillar's problems, multinational corporations have been in a position to benefit from stronger economies overseas.
"One of the reasons big-cap stocks have done so well is that they have a lot of foreign exposure and that is where profit growth has been," said Bob Schaeffer, portfolio manager at Becker Capital Management in Portland. "Domestic profitability has been flagging for some time."
In the coming week, earnings are due from pharmaceutical companies Merck & Co, Schering-Plough, Eli Lilly and Bristol-Myers Squibb. Others on the list include high-profile names as Boeing, Exxon Mobil and Ford.
Although investors have been caught off guard by the occasional earnings disappointment from companies such as Caterpillar and Pfizer, US stock indexes have been reaching lifetime and closing highs, with the Dow industrials closing above 14,000 for the first time on Thursday.
The Standard & Poor's 500, which earlier this month finally surpassed its old all-time set in 2000, also ended Thursday at a new closing high.
But worries about earnings shortfalls and subprime mortgages led to Friday's sharp pullback and broke a three-week streak of gains for the three big US stock indexes.
The subprime problem is tied to a weak housing sector, where sales have faltered and prices have slumped.
After losing ground on Friday, the Dow Jones industrial average finished the week down 0.4 per cent, the Standard & Poor's 500 Index dropped 1.2 per cent and the Nasdaq Composite Index declined 0.7 per cent.
For the year to date, though, stocks are sharply higher: The Dow is up 11.1 per cent, while the S&P 500 is up 8.2 per cent and the tech-laden Nasdaq is up 11.3 per cent.
- REUTERS
