Stocks may rise as earnings season starts

By Herbert Lash

NEW YORK (Reuters) - Stocks could rise next week if the first wave of quarterly earnings inject optimism about results for the period and on economic growth that has surprised on the upside.

Alcoa Inc. (AA.N), the world's largest aluminum company, kicks off another earnings season on Monday, and results from the second quarter could surprise on the upside because of the weak U.S. dollar.

"The earnings are going to surprise on the high side, mostly because the dollar has lost ground through the quarter and the analyst community always underestimates this effect," Milton Ezrati, senior economist and market strategist at Lord Abbett & Co.

On average, about half the earnings at companies that make up the benchmark Standard & Poor's 500 Index .SPX come from overseas, Ezrati said. When a foreign currency is strong, the conversion of earnings from abroad translates into more dollars.

"So it's a big factor, especially for the larger names, with some exceptions," Ezrati said.

Lord Abbett expects overall corporate earnings growth for the quarter to be in the high single-digits, because of the dollar effect, Ezrati said.

Genentech Inc. DNA.N, the world's second-largest biotechnology company, releases results on Wednesday, and General Electric Co. (GE.N) reports on Friday.

Stocks gained this past week, with the Dow Jones industrial average .DJI rising 1.5 percent, the S&P gaining 1.8 percent, and the Nasdaq Composite Index .IXIC adding 2.4 percent, its best weekly performance since late March.

Stocks may also get a lift next week from the announcement of new takeovers, which have underpinned the stock market because investors take their profits from shares in companies that have been bought and reinvest the proceeds in new shares.

With interest rates still relatively low -- the benchmark 10-year Treasury note yielded about 5.19 percent on Friday -- the potential return on stocks is attractive, and rates are low enough to continue to fuel takeovers.

"It keeps driving home the point that there's a large spread between the cost of debt financing and the return on equity investments," said Charles Lieberman, chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey.

"As long as that spread is so large, it creates a strong incentive" for buying stocks, he said.

Data to be released on Friday, especially retail sales for June, will be the macroeconomic focus of the week.

"If people just focus on the economy picking up and don't worry about the Fed, the market might rise if the earnings are good," said Edgar Peters, chief investment officer and director of asset allocation at PanAgora Asset Management Inc. in Boston.

"We have to wait and see how these higher gas prices will impact (retail) in the long run," Peters said.