The next test for stocks

Stocks bounced Thursday in a choppy session, as oil rebounded by more than 4 percent. For Friday, there are a few pieces of economic data — Market manufacturing PMI at 9:45 a.m. ET and leading indicators and existing home sales, both at 10 a.m.

Oil could resume its decline Friday, after West Texas Intermediate futures settled higher at $29.53 per barrel Thursday.
But as for stocks, they could languish until there's more evidence of the health of the economy and the state of corporate profits.

"I don't see anything that says to me the economy is really faltering," said James Paulsen, chief investment strategist at Wells Capital Management.Paulsen does expect the selling to continue until the S&P 500 breaks below 1,800. It closed at 1,868 on Thursday, up 9 points. With that gain, the index is now down 8.5 percent for the month of January.

But the earnings have weakened, and that means stocks were too highly valued, Paulsen added. Of the S&P companies already having reported, 69 percent have beaten earnings estimates but 51 percent have missed on revenues. Based on expectations and actual reports, S&P earnings are projected to decline 4.5 percent and revenues are expected to fall by 3.5 percent, according to Thomson Reuters.

LaVorgna, a chief economist at Deutsche Bank U.S., said if the Fed sounds more dovish after its meeting next week and some of the important upcoming data show improvement that would help markets.
Some of the key data expected over the next two weeks include consumer sentiment, the employment cost index, durable goods and fourth-quarter GDP next week.

The Fed meets in the coming week and is expected to take no action on rates, but it will be watched for any change in tone about the economy or future rate hikes. The next two weeks are also the heaviest of the corporate earnings-reporting season.