NEW YORK (MarketWatch) -- U.S. stocks will face renewed pressure next week, with investors facing not only another heavy week of earnings, but also key data that may confirm the U.S. economy is in recession and a Federal Reserve increasingly expected to pause its campaign to lower interest rates.
On Wednesday, the market will deal with the first reading of first-quarter gross domestic production, which may show negative growth, along with the Fed's decision on interest rates. The market currently expects the central bank to cut its key rate by a quarter-percentage point and to signal a pause. Friday also will bring the all-important April jobs report.
"Next week will be a make-or-break week," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "Are we in a recession? Is the Fed going to be one- and done? Either way, it will give us a feel for where we're going in the short term."
A late turnaround on Friday helped stocks finish the day and the week higher. This marked the second week of gains in a row, and kept the market on the uptrend that began in mid-March, after the near-collapse and subsequent bailout of investment firm Bear Stearns Cos.
The Dow Jones Industrial Average gained 42 points, or 0.3%, to 12,891, giving it a 0.4% gain on the week.
Blue chips were supported by a smaller-than-expected loss at American Express Co. , shares of which gained nearly 6%.
Overseas profits helped cushion losses in the credit-card giant's U.S. operations, echoing a now-familiar tone of this earnings season.
The broad S&P 500 Index added 9 points, or 0.7%, to 1,397, leaving it 0.5% higher on the week.
But the technology-laden Nasdaq Composite Index fell 5.9 points, or 0.3%, to 2,422, which is up 0.8% from last Friday.
Software giant Microsoft Corp. disappointed the market with revenue for the previous quarter and its outlook for the next falling short of Wall Street's expectations.
"This reflects the mixed nature of the economy right now," said Ken Tower, chief market strategist at Covered Bridge Tactical. "At the start of earnings season, we had the disappointment from GE, a bunch of OK earnings and then Microsoft disappointing."
Overall, multinationals report that losses related to the weakening U.S. economy are being somewhat offset by international sales. A weak dollar has made U.S. goods cheaper for foreign consumers. Multinationals' results also benefit from translating overseas revenue into weaker dollars.
Two weeks ago, the market was shocked by General Electric Co. , with a surprise loss at the stalwart conglomerate fueling fear that global growth wouldn't be enough to overcome the impact of the credit crisis and of a U.S. recession on profits.
But since then, industrial firms such as Honeywell Inc. , Caterpillar Inc. and 3M Co. , along with the likes of fast-food giant McDonald's Corp. and Coca-Cola Co. have all cited international sales as helping to shore up overall profits.
Earnings for S&P companies are now expected to have fallen 14.1% in the first quarter from the year earlier, a slight improvement from forecasts of a 14.6% drop last week. Results at ailing financial firms are weighing on overall results, with the sector expected to post a whopping 70% drop in profits from the year earlier.
"But we are seeing strong earnings with companies benefiting from pockets of strength and their strong presence overseas," said John Butters, earnings analyst at Thomson Financial.
The industrial sector of the S&P is now on track to post earnings growth of 7% for the first quarter, while the technology sector is expected to gain 9%, thanks to the likes of International Business Machines Corp.
Energy, which is expected to be the best-performing sector of the S&P, will be in focus next week with Dow components Exxon Mobil Corp. due to report on Thursday and Chevron Corp.'s reults due out Friday.
Three other blue chips are due to report next week, starting with telecom giant Verizon Communications Inc. and General Motors Corp. , with Procter & Gamble Co. on Wednesday.
Turning to oil, crude surged again Friday, gaining more than $2 after reports that a U.S. cargo ship fired at two unidentified boats in the Persian Gulf. The barrel ended at $118.52, gaining 1.6% on the week.
Fed on tap
The central bank is widely expected to cut its key rate by a quarter-percentage point to 2% on Wednesday. It's also increasingly expected to signal in its statement that it will pause, at least for now.
Given improved sentiment in financial markets, central bankers are now believed to have grown more concerned about a surge of inflation in energy, food and commodity prices.
Expectations of lower rates have put heavy pressure on the dollar since last summer, but the greenback appears to have stabilized somewhat recently, along with expectations that the Fed's job is done.
Yet the market's reaction to the "one-and-done" scenario might well depend on both the estimate of first-quarter gross domestic production and the April employment report.
"If the advance GDP comes in as a positive number, then the market will be wiling to accept it," said Mendelsohn of Windham's Financial. "If not, they won't. It's the same for the employment numbers."
Economists surveyed by MarketWatch expect no growth for the first quarter. Meanwhile, the economy is expected to have shed another 85,000 jobs in April.
By Nick Godt