The trading week will be shortened by the Independence Day holiday on Wednesday. The lower volume throughout the week will likely exaggerate stock movements in either direction and extend the stay of volatility in the market, said equity professionals.
Market players not taking the rest of the week off will have plenty of data to sort through leading up to Friday's monthly jobs report from the Labor Department. Readings on manufacturing and services activity will come from the Institute of Supply Management, as will factory orders from the Commerce Department, and June sales figures from automakers.
But investors will increasingly begin to monitor earnings-related developments as the traditional kick-off of earnings season approaches. Alcoa Inc. will be first out of the gate on July 9.
The estimate for second-quarter earnings growth is now 4.3%, according to Thomson Financial. That's up from the estimate of 3.9% growth a week ago largely because profit projections for the energy sector have climbed. The sector is now expected to report earnings growth of 2% compared with an earlier forecast for a decline of 9%.
"Earnings are still rising and P/E's are low enough that if earnings should go up, stock prices should go with them...so we should see the market moving higher in general," said Lincoln Anderson, chief investment officer at LPL Financial Services.
Thomson's ratio of corporate warnings to positive forecasts is 3.2, which is more negative than the ratio of 2.0 that's normally present at this point of the quarter.
But George Yared at Yared Investment Research said he still believes earnings expectations will provide support for stocks next week.
"There's always that small company that says 'We blew our quarter," he said. But "I think we're going to be more bent on the upside because pre-announcements from bellwether companies will be at a minimum."
Analysts said the earnings picture should also be helped by an expected addition of 125,000 jobs to nonfarm payrolls in June. Payrolls in May rose by 157,000.
The 4.5% jobless rate is forecast to remain steady, as are average hourly earnings. The gauge of wage inflation is expected to stay at 0.3%.
"That's right in [the market's] comfort zone. They want to see employment growth but they want to see low employment growth that's consistent with continued company cost control," said Anderson.
But the equity market doesn't appear ready to zero in earnings news alone. Stocks were dogged this past week as problems in the subprime mortgage market nearly led to the collapse of two hedge funds run by Bear Stearns Cos. .
Worries about a credit crunch and its impact on consumer lending and corporate borrowing for mergers will persist in the week ahead, said Tony Crescenzi, chief bond market analyst at Millar Tabak & Co., in a note Friday.
"It will be difficult to gauge whether the credit markets are returning to normal following a week where deals were cancelled, cut in size, and restructured to offer investors more protection."
While the worries about the subprime market are "not dead," Yared said that the issue, in his view, is "not a crisis." He said larger financial institutions "are aggressively managing the issue...they did raise their reserves, they are going after customers to renegotiate. But it's not [an issue] to take down the mortgage market or cause financial catastrophe."
David Rosenberg, head of U.S. investment solutions at Citigroup Private Bank, said that anything that crimps the ability to borrow and fund deals will be interpreted as a warning sign by the maket.
"The problem is more of a message about overall liquidity. It's not the economic feasibility of a levered business, it's whether or not the ease of credit will continue," he said. "If people pull back in lending and they are not going to buy deals, then you're still going to have an issue."
Before investors can take a holiday break on Wednesday, the Institute of Supply Management will release its index of manufacturing activity on Monday. The index is expected to edge higher to 55.3% from 55%. Readings over 50 indicate expansion in the economy.
The Commerce Department's factory orders report for May is set for release on Tuesday. Economists are looking for a decrease of 0.3%, a reversal of a 0.3% gain.
But the ISM' services index could move down to 57.5% from 59.7% in May when that report is released Thursday.
Crude-oil prices jumped $1.11 to close at $70.68 a barrel on concerns about supply availability during the summer. The market also pushed higher following the discovery of two cars rigged as bombs in London.
"Certainly the bomb discovered in London...serves to remind that terrorist attacks can come at any time," said Michael Fitzpatrick, an analyst at Man Financial, in a note to clients. "But "it won't be enough to support consistently rising prices either."
The rise in oil prices pulled stocks lower, erasing gains. Investors had been buying up shares before the books closed on the second quarter.
The Dow Jones Industrial Average fell 14 points to end at 13,408. The S&P 500 lost 2.3 points to end at 1,503 and the Nasdaq Composite fell 5 points to 2,603.
All of the benchmark indexes lost ground during June but closed higher for the second quarter.
Treasury prices rallied, sending yields lower, boosted by news that consumer price inflation was tame in May. The yield on the benchmark 10-year Treasury note fell to 5.033% from 5.117% on Thursday.
The dollar slid against the euro as an improved employment picture in France dampened demand for the greenback.
Gold futures rose 50 cents to end at $605.90 an ounce but closed lower for the week, for June and for the quarter as traders continued to gauge investment demand for the precious metal.
By Carla Mozee