U.S. stocks will be hard pressed to turn the tide of recent selling during the coming week as political jousting over raising the debt ceiling intensifies.
The benchmark S&P 500 index last week recorded its worst weekly loss in five weeks.
Investors, frustrated by the lack of progress in the debate between the Democrat-controlled White House and Senate and the Republican-majority House, could move into what are perceived as safer assets, such as cash.
While the wrangling over the debt ceiling takes center stage, earnings season will continue to heat up after a solid first week. According to Thomson Reuters data, 39 companies in the benchmark S&P 500 index have posted results, with 74 percent reporting earnings that topped Wall Street estimates.
Companies in the index are forecast to show a 6.5 percent rise in profits over the second quarter of 2010 when all the reports are in.
For last week, the S&P 500 ended down 2.1 percent; the Dow fell 1.4 percent and the Nasdaq declined 2.5 percent.
The overhang from the debt ceiling issue could diminish the focus on earnings.
House Speaker John Boehner, the top U.S. Republican in Congress, said President Barack Obama and Democrats had still not put a serious deficit plan on the table, underscoring the acrimony in negotiations to avert a government default.
"The news flow next week dealing with the deficit issues and the political posturing that is taking place is going to intensify and is really going to drive these markets," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
"People are starting to get nervous about what they are seeing out there. For a portfolio manager -- let alone an average investor -- this is a treacherous market to be trying to position yourself in."
ECONOMY IS A "DISASTER"
Economic data on tap for the coming week include several reports on the housing market -- June housing starts on Tuesday and existing-home sales on Wednesday. In addition, data is due on leading economic indicators for June and the Philadelphia Fed survey of manufacturing activity in the Mid-Atlantic region. Economic reports over the last month have raised questions about the health of the U.S. recovery.
"The bigger picture is the economy is still a disaster," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
Saluzzi said people still are watching earnings for signs growth may be stagnating. "Eventually, companies are not going to keep cutting costs."
Quarterly results are expected from a slew of companies in the coming week, with more than 10 Dow components scheduled to report.
Major financial companies due to report include Goldman Sachs, Morgan Stanley, Bank of America Corp and American Express. Also on the calendar are earnings news from technology companies Apple Inc, Microsoft Corp and Intel Corp.
"Let's see what all the rest of these guys have. Let's see if it's still being driven by cost cuts or are they actually getting revenue gains. That is going to tell me a lot more than if they cut the debt deal," said Saluzzi.
After the S&P 500's weekly loss, the index was just below its 50-day moving average, a technical level which could indicate more selling. Some analysts believe the market could still come back if the U.S. debt issue is resolved soon.
"This area, as far as it pulling back, is balancing the threat of a default, but it would take an actual default to take us much lower than here," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.
But the longer the debt-ceiling question continues without a conclusion, the bigger the risk for further declines in stocks and for volatility to spike. The CBOE Volatility index rose nearly 30 percent for the week
"The more it drags out into Tuesday, Wednesday, Thursday or whatever, then we've got some serious issues. That will be an overhang no matter how good the financials come in terms of earnings reports next week," said Tommy Huie, chief investment officer of BMO Asset Management U.S. in Milwaukee, Wisconsin.
"It could be a pretty volatile week, no doubt about it."
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