US stocks look set to rise again this week, but only if the stellar first-quarter earnings season continues and investors overcome their fears of higher interest rates.
Each of the main US stock indexes moved up this week, putting them a touch above levels at the end of last year, as a string of industry leaders like Caterpillar Inc and Microsoft Corp blew past Wall Street's best hopes.
But Federal Reserve Chairman Alan Greenspan put a dampener on the party as he suggested in two appearances this week that an increase in interest rates is not far off, as the Fed moves into position to fight off the first signs of inflation. "I think we will continue to get better-than-expected earnings reports," said Ozan Akcin, chief market strategist at Puglisi & Co. "But the stronger top and bottom lines show how good the growth is, and that means interest rates will have to rise at some point."
Stock investors dislike rising interest rates, which tend to make equity investments more expensive in relation to bonds, and may also cap corporate profit for a time, as higher borrowing costs eat into companies' budgets and consumers' purses.
But once the fact of rate hikes is accepted, companies will enjoy the fruits of the booming economy, many analysts say, predicting further gains for the market.
"Greenspan made it clearer that a rate hike is likely this year," said Jeff Kleintop, chief investment strategist at PNC Advisors. "But optimism from CEOs, in many cases heard for the first time since 1999, is bolstering investor confidence that corporate America can weather a series of rate hikes."
Excitement in the boardroom was led by James Owens, chief executive of Caterpillar, who said on Thursday that the world economy "will have one of the strongest, broadest recoveries in years" as his company reported a tripling of earnings.
Of the 180 S&P 500 companies that reported earnings this week, 140 companies - or 78 percent - beat analysts' consensus estimates, according to Reuters Research. So far this reporting season, 274 S&P components have reported, with 211 beating Wall Street's average expectation.
Those results helped push the Dow Jones industrial average up 0.2 percent for the week, the Standard & Poor's 500 Index up 0.5 percent and the Nasdaq Composite Index up 2.7 percent. It was the first week since April 2 when all the major indexes rose.
The exceptional run of earnings looks set to continue this week, with Reuters Research data showing that analysts now expect first-quarter S&P 500 profit to be up 20.4 percent for the quarter, up from a projection of 16.1 percent a week ago.
About 135 of the S&P 500 components report earnings this week.
The most closely watched reports start on Monday with EDS, also known as Electronic Data Systems Corp, followed by Dow components DuPont Co, McDonald's Corp and Verizon Communications on Tuesday.
On Wednesday, Boeing Co and Bristol-Myers Squibb Co are scheduled to report. On Thursday, results are due from Exxon Mobil Corp, Gateway Inc and Gillette Co.
The busy week comes to a close on Friday with Procter & Gamble Co and ChevronTexaco Corp.