Week ahead: Are stocks set for a down year?

The adage "as January goes, so goes the year" bodes ill for equity investors after the S&P 500 closed out its worst month in almost a year. In the coming week, they will have to contend with fears of sovereign defaults and the potential for unpleasant surprises in the US labour market.

US corporations have so far handily beat analysts' earnings forecasts. With heavyweights like Exxon Mobil Corp and United Parcel Service set to report this week, investors will be looking for that to continue, going some way to offset the perception that political risk is on the rise.

The Standard & Poor's 500 Index fell 3.7 per cent in January and is off nearly seven per cent from its high this month. Investors are worried that Greece's debt troubles may herald a wave of sovereign defaults in the euro zone that could derail an economic recovery.

"There's a lot of concerns going on as far as the sovereign debt is concerned in a lot of the nations, specifically in the euro zone," said David Lutz, Managing Director of Trading at Stifel Nicolaus Capital Markets in Baltimore.

A heavy week for economic data will culminate in Friday's non-farm payrolls report. Analysts believe the economy added 5,000 jobs in January, according to a Reuters poll. Another negative surprise after the previous month's unexpected surge in job losses could roil markets.

"The next headline is going to be this unemployment data that is coming out, and there is no indication it is going to be moving in the direction in which we want it to move," said Jonathan Corpina, Senior Managing Partner of Meridian Equity Partners in New York. Friday's jobs number will be presaged by the ADP private sector jobs report on Wednesday.

Around 500 US companies have reported quarterly earnings so far and of those, 73 per cent have beaten earnings estimates, exceeding the 68 per cent that beat in the last two quarters, according to data from Bespoke Investment Group.

But that positive earnings picture has not translated into gains for the stock market this time around.

Bespoke Investment Group's data shows the average stock of a company whose earnings beat estimates gained only 0.8 per cent, compared to a 2.9 per cent drop in those that missed. "The companies beating aren't being rewarded by nearly as much as the companies that miss are being punished," Bespoke Investment said in its research note. After consecutive quarters when better-than-expected earnings helped drive stocks up more than 66 per cent from last year's lows, fourth-quarter numbers may have already been factored into the market.

Highlights in the second full week of earnings will include Exxon Mobil tomorrow, which is the first of a number of energy companies reporting, as well as delivery service UPS on Tuesday. UPS, viewed as a window on the economy's health, raised its profit forecast earlier this month.

Exxon is expected to post earnings per share of $1.19, while UPS is seen reporting 73 cents per share.

The US economy grew at its fastest pace in more than six years in the fourth quarter of 2009, expanding at an annual pace of 5.7 per cent – much more than most economists had expected.

There will be an early indication of the sustainability of growth when the Institute for Supply Management releases its manufacturing report for January. Economists in a Reuters poll are expecting a reading of 55.2, showing an expanding sector for the sixth straight month.

That will be followed by the ISM's service sector survey on Wednesday, expected to edge into growth mode after the largest segment of the US economy struggled to find its footing in the fourth quarter of last year. "The economy is showing no signs of a self-sustaining recovery," said David Wright, portfolio manager at Sierra Core Retirement Fund in Santa Monica.

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