MARKET SNAPSHOT: Durable Goods In Focus As Capital Spending Signal

By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch)--Durable goods orders and how they translate into capital expenditures will likely be one of the main catalysts for investors this week as U.S. stocks are expected to remain subdued before the more volatile midterm elections season following Labor Day.

In the past week, the Dow Jones Industrial Average (DJI), the S&P 500 index (SPX), and the Nasdaq Composite Index (RIXF) all notched low-volume gains for a third week in a row on a host of better-than-expected economic data.

But even with the better economic data, what a sustained market run really depends on is how that translates into improved earnings growth, said Jerry Webman, chief economist at OppenheimerFunds.

To get past boosting earnings through cost-cutting, companies need to boost revenue through reinvestment and capital spending, he said. One indicator on how companies are faring in this regard is a read of capital expenditures spending in durable goods data, which is set to come out on Tuesday.

"Durable goods numbers, the capital goods portion, tells me what businesses are doing," Webman said.

Economists surveyed by MarketWatch expect a consensus 13% gain in July durable goods orders, with some economists forecasting a surge by as much as 30%. With the drying up of cheap money on the horizon, companies may be more under the gun to pull the trigger on upgrades.

Nearly all of the companies in the S&P 500 have reported results this season and earnings growth is tracking at 7.7% over the year-ago quarter, according to FactSet data. That earnings trend is going to have to remain strong for the second half of the year, where double-digit increases are expected, to satisfy investors who already think price-to-earnings ratios are high.

Even so, U.S. stocks are still looking pretty good compared with other asset classes, even with those higher multiples, according to Brad Sorensen, Charles Schwab director of market and sector research.

"There's the potential [U.S. stocks] could get dragged down by Europe," Sorensen said. But when one takes into account the improvement in the labor market, better-than-expected earnings, a more optimistic tone from U.S. corporations, and increased capital expenditures, they're a better bet than Treasurys and European stocks, he said.

Other possible catalysts this week include July new home sales on Monday, and the second-quarter GDP revision on Thursday.

Janet Yellen has spoken. Now what?

One takeaway from Federal Reserve Chairwoman Janet Yellen's Jackson Hole speech on Friday is that investors need to concentrate less on what the Fed says and focus more on what data the Fed is following, Oppenheimer's Webman said.

Yellen balanced out hawkish comments with dovish ones, namely, while the timing on when to hike interest rates is now under debate, several labor market indicators suggest the unemployment rate may be overstating overall improvement in labor market conditions.

Webman said there's no one metric to be focused on, but investors need to look at those connected to labor: Whether participations rates are rising, whether there's upward pressure on wages, and whether more discouraged workers are returning to the labor force.

Earnings season dwindles to a trickle

With earnings season essentially run its course, there are still a few companies left reporting quarterly results this week.

In the S&P 500, Best Buy Inc. (BBY) and Analog Devices Inc. (ADI) report on Tuesday. On Wednesday, earnings reports from Brown-Forman Corp. (BFB) and Tiffany & Co. (TIF) come out. Then, on Thursday, Pall Corp. (PLL), Dollar General Corp. (DG), and Avago Technologies Ltd. (AVGO) report.

Other companies reporting this week include Smith & Wesson Holding Inc. (SWB), TiVo Inc. (TIVO), Williams-Sonoma Inc. (WSM) and Abercrombie & Fitch Co. (ANF)

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