Earnings to lift stocks

NEW YORK (Reuters) - Stocks should complete the last leg of their recovery from February's big sell-off next week as Friday's surprisingly strong job growth data calms investor concerns about the outlook for the economy and consumer spending.

The next question is whether U.S. equities can then take the step and recapture the record levels from two months ago. That will hinge on the corporate profits picture, which begins taking shape next week as the first of the market's bellwethers deliver first-quarter earnings reports.

"Unless we see a more significant drop in profit margins than the market might be expecting, the trend will probably be higher," said Brandon Thomas, chief investment officer at Envestnet Asset Management in Chicago.

While the number of scheduled earnings releases is not large, investors will see results from Dow industrials components Alcoa Inc. (AA.N) and General Electric Co. (GE.N), both seen as important indicators of the condition of the global economy.

Alcoa, the world's largest aluminum producer, reports on Tuesday, and GE, whose operations range from heavy industry to media and international finance, will announce results on Friday.

Stock markets had a holiday Friday ahead of the Easter weekend, but in their absence the U.S. Labor Department reported 180,000 nonfarm jobs were created in March, far more than expected, and job-creation figures from January and February were revised upward. The unemployment rate fell to 4.4 percent from 4.5.

The news sent bond yields soaring to seven-week highs, and Fed fund futures showed a diminished likelihood of a Federal Reserve benchmark interest rate cut any time soon.

"The figures inflicted a sharp blow to the view that the economy deteriorated in the aftermath of the February 27 stock market adjustment and emergence of subprime (mortgage sector) woes," said Michael Englund, chief economist at Action Economics in Boulder, Colorado.

U.S. equity index futures, which did trade Friday, also soared on the payrolls data, suggesting that Monday's opening bell could bring significant gains.

Barring any unpleasant surprises through the rest of the weekend, the only thing standing between stocks and a full rebound from the February 27 global sell-off would be a big let-down from these two blue chips.

"GE is a bellwether stock, particularly in this type of market," Thomas said. "If the earnings are relatively strong, and I think there are indications a couple of divisions are doing quite well, then that bodes well for the market."

By Thursday's close, stocks were just a whisker from their February 26 closing levels, the day before stocks tumbled around the world after a 9 percent drop in Chinese stocks provided a catalyst for a flight from risky assets.

According to Reuters Estimates, of 24 Standard & Poor's 500 companies that have already reported quarterly earnings through March 30, 75 percent beat estimates, 8.3 percent have missed, and 16.7 percent matched estimates.

"People have been shrugging off the concerns that sparked the move down in late February," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.

"The subprime (mortgage) market debacle has for the most part been shrugged off by equity investors, and we're almost back to where we were when the move down started," he said.

For the past week, the blue-chip Dow Jones industrial average .DJI rose 1.66 percent and the broad Standard & Poor's 500 index .SPX gained 1.61 percent. The Nasdaq Composite Index .IXIC rose 2.05 percent.

CONSUMER DATA ON TAP

Several polls of consumer sentiment are on the week's agenda, including the ABC/Washington Post weekly consumer comfort index on Tuesday and the Reuters/University of Michigan Surveys of Consumers due on Friday.

The Reuters/University of Michigan consumer sentiment index is expected to fall to 87.5 in April from 88.4 in March, according to the median forecast in a Reuters poll of economists. The March figure was the lowest since 85.4 in September 2006.

Consumer sentiment can be hurt by rising prices. Wall Street gets a look at March producer prices, also on Friday.

According to the Reuters poll, economists expect a 0.7 percent rise in prices overall, and a 0.2 percent rise excluding volatile food and energy. In February, the overall number was up 1.3 percent; excluding food and energy, producer prices rose 0.4 percent.

Further signs of consumer activity will be coming in the March sales reports from retailers on Thursday.

On Friday, the Commerce Department reports on global goods and services trade for February. According to the Reuters poll, the U.S. deficit is expected to rise slightly to $60.0 billion from $59.1 billion in January. The January deficit was a decline from December.

Axel Merk, manager of the Merk Hard Currency Fund, says that as the U.S. economy slows, smaller trade gaps are to be expected because imports fall. In fact, January saw imports falling and exports rising.

"I think the trade deficit will be better behaved, but, having said that, it's not necessarily good news," Merk said.

Fed watchers get to study the minutes of the March policy meeting, which are due to be released on Wednesday. At that meeting, the Fed left short-term rates unchanged at 5.25 percent but altered some of the wording in the accompanying statement.

(Additional reporting by Caroline Valetkevitch, Ellis Mnyandu and Chris Reese)