U.S. Stocks Seen Pushing Higher Next Week

SAN FRANCISCO (MarketWatch) -- U.S. stocks will push higher next week, driven by healthy corporate earnings, bubbling mergers and acquisitions activity, and expectations that the Federal Reserve will leave interest rates unchanged at its policy setting meeting on Wednesday, strategists said.

Stocks rose to new heights this past week, leading some analysts to say that major indexes are overbought. But they said M&A activity and strong corporate earnings should keep stocks on the rise and outweigh negative factors including a possible rise in wholesale inflation.

"It would be reasonable to expect the market to tread water going into the Federal Reserve meeting. Having said that, there's a momentum here that can feed on itself," said Mike Holland, fund manager at Holland Balanced Fund. "We're getting continued acquiescence that some people are just putting money into the market."

Results are still due from 35 companies listed on the Standard & Poor's 500 Index, including Cisco Systems Inc. , Viacom Inc. and Alcatel-Lucent .

Two components of the Dow Jones Industrial Average are also scheduled to report: insurer American International Group and Walt Disney Co. .

A slew of potential deals have been keeping stocks rising, including reports Friday -- later discounted -- of a possible tie-up between tech giants Yahoo Inc. and Microsoft Corp. ; a $15 billion takeover bid for Reuters Group PLC ; and a $5 billion bid from News Corp. for Dow Jones & Co. , owner of MarketWatch, the publisher of this report.

Investors will also watch closely for the results of the Fed's policy setting meeting on Wednesday. The U.S. central bank is expected to keep the key overnight interest rate steady at 5.25%. The rate has been held at that level since June 2006.

The Fed "will still pay lip service to their concern about inflation, but I'm quite confident that there will be no major shift in emphasis or in policy," said Michael Metz, chief investment strategist at Oppenheimer & Co.

While investors don't foresee much change in the statement that accompanies the Fed's decision, the weaker-than-anticipated reading the April jobs report increased expectations that a rate cut will come later this year.

The Labor Department on Friday said job growth April slowed to 88,000, its weakest level in four years. A key reading on wage inflation also came in lower than expected, with an increase of 0.2% vs. 0.3%.

"The wage number is not growing so fast...and all the market cares about right now is that inflation component heading into the FOMC meeting," said Marc Pado, U.S. market strategist at Cantor Fitzgerald.

On Friday, the Producer Price Index is expected to show an increase of 0.5% after a 1% gain in March. Meanwhile, the core PPI, which excludes food and energy prices, is expected to show an increase of 0.2%.

Meanwhile, a weaker-than-expected reading on retail sales in April, also due Friday, could ease or reverse the buying trend in stocks because of the importance of consumer spending to the economy, said Peter Boockvar, equity strategist at Miller Tabak.

Economists are looking for a 0.3% increase in retail sales for April, down from an increase of 0.7% in March. Excluding automobiles, retail sales are expected to rise 0.5% vs. 0.8% in March. Same-store sales figures from retailers are also due Wednesday and Thursday.

"The key is how the latter part of April went because the weather started to get better, and how those trends continue into May," said Boockvar.

Investors will also look for the report on wholesale inventories on Tuesday, which are expected to have increased 0.3% in March compared with a 0.5% increase in February.

The market is overdue for consolidation, said Metz, but he said he doesn't believe a sharp decline is likely because "there's still an enormous amount of money looking to go into the system, so that will tend o put some sort of bid under the market."

Earnings rate rises

The first-quarter blended earnings growth rate rose again this week, to 8.1% from 7.2%, according to Thomson Financial.

The telecom sector is now on track to produce the highest rate of year-over-year growth, at 21%.

"A lot of [telecom] companies' year-ago numbers were adjusted to exclude discontinued operations" which lifted the group's growth rate, said John Butters, senior research analyst, at Thomson Financial. "In aggregate, the telecom companies didn't do all that well versus expectations. They are only beating the estimates in aggregate by 2%."

The consumer discretionary sector is still ranked last in terms of earnings growth expectations, with a decline of 5%.

Looking to the second quarter, the growth rate is up to 3.5% from 3.2% last week, as estimates for energy sector have edged higher.

Friday's market

The benchmark indexes fell following the release of the jobs report on Friday, but they pulled out of the red by session's end. The Dow industrials finished up 23 points to finish at a record close of 13,264. The index climbed 1% for the week.

The S&P 500 picked up 3 points to end at 1,505, a day after crossing the 1,500 level for the first time in nearly seven years. The broad index gained 0.7% for the week. At the same time, the Nasdaq Composite finished up 7 points at 2,572 on Friday and by 0.6% for the week.

Treasury prices rose Friday after the softer-than-expected jobs report. The yield on the benchmark 10-year Treasury note closed at 4.64%, down from 4.675% on Thursday.

The dollar also lost ground against its major rivals following the jobs report. However, it finished up 0.4% against the euro and 0.5% against the yen for the week.

Crude-oil prices fell below $62 a barrel on Friday and by 7% for the week. But market players are also keeping tabs on retail prices for gasoline as they moved closer to their all-time high of $3.057.

Gold futures closed near $690 an ounce on Friday and rose more than 1% for the week.

By Carla Mozee