Earnings to set tone, upside seen limited


Investors head into this week on the defensive as the potential for U.S. equity gains could be limited even if earnings begin on a strong note.

The early fourth-quarter results will set the tone. Any weakness will give traders a reason to pull back from the rally of recent weeks, which stalled on Friday on bank stock losses and lackluster jobs data.

Still, the major indexes finished with a sixth straight week of gains last week: the Dow was up 0.8 percent, the S&P 500 up 1.1 percent and the Nasdaq composite index ahead 1.9 percent.

Alcoa Inc (AA.N) is set to release results on Monday after the market’s close, unofficially launching the quarterly earnings season. Intel Corp (INTC.O) and JPMorgan Chase & Co (JPM.N), also Dow components, will likewise issue their report cards during the week and are expected to do well.

“It will be important to get out of the box with a positive note,” said James Dunigan, who helps manage $105 billion at PNC Wealth Management in Philadelphia. “If that’s the case, we have a little way to run and can keep rising, but if the results disappoint there will be reason to step back.”

The S&P 500 (.SPX) has climbed 7 percent since the start of December while Alcoa has soared 25 percent and JPMorgan has surged 16 percent. Analysts say that such rapid gains leave the market more vulnerable for a pullback and could limit upside potential.