Watch Europe.
It will hold the key to your investments in the week ahead. Lately, investors have been betting that by Wednesday European leaders will settle on a bailout plan that will keep eurozone debt problems from becoming a global banking and economic threat.
If negotiations fall apart or Europe’s financial commitment seems too lean, stocks could get brutalized again, as they did in the third quarter. Yet, for the last four weeks, stocks have climbed on the expectation of a deal. And that optimism has repaired some of the damage fear caused in August and September. Now, the Dow Jones industrial average is just 7.8 percent from April’s high, and 2 percent above where it started the year.
Though some analysts think that the eurozone will suffer a recession even with a bailout in place, there is increasing optimism that the U.S. will be able to avoid one. At the end of last week, economists were tweaking their expectations higher for the rest of this year after a manufacturing index from the Philadelphia Federal Reserve was surprisingly strong. Economists had expected it to register a decline of 9, but the index came in at a positive 8.7. September retail sales were also stronger than expected, and there have been modest payroll gains.
While the economy appears to be more resilient than economists had expected, Goldman Sachs strategist David Kostin noted Friday that “investors are underwhelmed” with the earnings companies have reported for the third quarter. Though Standard & Poor’s 500 operating earnings per share look like they will hit a new high, he said, the percentage of firms surprising investors with strong earnings is below average. Further, chief executives are voicing concerns about the near future.
Information technology stocks have reported the most positive surprises, Apple notwithstanding. The company that represents 16 percent of the sector disappointed investors. Kostin thinks analysts were expecting too much from companies and will be revising things down.
