Wall Street is experiencing its best month since January and looks poised to extend the rally with a deluge of earnings next week, though significant gains may be harder to come by with major indexes at record highs.
Eight Dow components and Apple (AAPL.O) are among the companies that will report in one of the busiest weeks of the earnings season. Some 157 companies in the S&P 500 index will release results.
Second-quarter earnings have been above forecasts so far, but analysts' estimates have dropped precipitously since the start of the year. Earnings for S&P 500 companies are seen rising 2.9 percent, according to Thomson Reuters data, down from an 8.4 percent growth expected at the start of the year. Revenue is seen growing 1.1 percent.
Still, stronger-than-expected reports spurred gains in IBM (IBM.N), General Electric (GE.N) and others. In addition, Wall Street banks Citigroup, Goldman Sachs and Morgan Stanley reported strong earnings.
For this week, the Dow rose 0.5 percent, the S&P added 0.7 percent and the Nasdaq fell 0.3 percent. The benchmark S&P is up 18.6 percent for the year.
On the other side of the ledger, Microsoft (MSFT.O) was a big disappointment, and its shares fell 12 percent on Friday. Both Microsoft and Google (GOOG.O) fell short of Wall Street expectations, causing their shares to slump.
Of the 104 companies in the S&P 500 that have reported through Friday, 65.4 percent had earnings above analyst expectations, while 51 percent topped revenue estimates.
EYES ON APPLE
Apple, the second-largest U.S. company by market capitalization, will be watched to see if it can reverse the trend of weaker-than-expected tech sector earnings. The company, which is due to report on Tuesday after the market's close, is expected to show a drop of more than 21 percent in quarterly profit and revenue growth of 0.2 percent.
The Federal Reserve has been the primary driver of the market for a long time. But that should change, at least for a time, after investors were reassured that the Fed would be flexible in the timing of its withdrawal of stimulus measures and would keep interest rates ultra-low for an extended period.
The Fed's stimulus played a major part in the S&P's advance so far this year. Investors now speculate earnings will be the next catalyst to push stocks higher.
"So far it's been about the Fed supporting the movement upwards, but at a certain point there's a handoff, and earnings will have to take over," said Kristina Hooper, head of investment and client strategies at Allianz Global Investors in New York. "Earnings are going to be so critical to the future of the stock market recovery."
Analysts have generally been bullish on 2013's second half, though they have been slowly lowering estimates for the third and fourth quarters to reflect concerns about the economy's growth.
Per-share earnings growth is expected to be 7.8 percent in the third quarter and 12.4 percent in the fourth quarter. That compares with a July 1 estimate of 8.5 percent growth and 13 percent growth, respectively, according to Thomson Reuters data.
NEED FOR REVENUE GROWTH
"Revenue growth is especially important," said David Joy, chief market strategist at Ameriprise Financial in Boston. "If revenues aren't increasing, it's going to be awfully tough for the bottom line to increase."
Joy, who helps oversee about $708 billion in assets, added that it was encouraging to see revenue coming in slightly ahead of expectations.
"My sense is that the markets can hang in there next week," he said. "The trend is to the upside."
General Electric Chief Executive Jeff Immelt said he was bullish on the outlook for the rest of the year, a sentiment echoed by other executives.
But Nick Heymann, an analyst at William Blair & Co, which trades GE shares, said for GE to achieve its goal of boosting 2013 margins by 0.7 percent would "require Herculean improvement in the second half.
With 21 percent of the S&P components having reported, roughly two-thirds have beaten profit expectations, slightly above the historical average. About half of the companies have topped revenue forecasts, a rate better than the average over the past four quarters.
Next week's earnings roster includes Dow components AT&T (T.N), McDonald's (MCD.N) and Boeing Co (BA.N). Ford Motor Co (F.N), Visa (V.N) and United Parcel Service (UPS.N) are also due. UPS, which is viewed as a proxy for business activity, recently cut its outlook, citing a weak U.S. economy and overcapacity in the global air freight market.
Economic indicators next week include sales of new and existing homes. Sentiment among builders remains bullish, though housing starts and permits for future homes hit a 10-month low in June.
"Obviously a big surprise there to the downside will cause a lot of caution," said Andrew Yorks, chief investment officer at Four Wood Capital Partners in New York. "The housing sector's been a core part of what the Fed is focusing on."
June existing-home sales, which are due Monday, are seen rising 0.6 percent compared with a 4.2 percent jump in the previous month. New-home sales for June are also seen rising, according to Thomson Reuters estimates.