Encouraging data from US as key index climbs ever higher

With earnings momentum on the rise, the S&P 500 seems to have few hurdles ahead as it continues to power higher, its all-time high a not-so-distant goal.

The US equity benchmark closed the week at a fresh five-year high on strong housing and labour market data and a string of earnings that beat lowered expectations.

Sector indexes in transportation, banks and housing this week hit historic or multiyear highs as well.

Michael Yoshikami, the chief executive at Destination Wealth Management in Walnut Creek, California, said the key earnings to watch for this week will come from cyclical companies.

United Technologies reports on Wednesday while Honeywell is due to report on Friday. "Those kind of numbers will tell you the trajectory the economy is taking," said Mr Yoshikami.

Major technology companies also report this week, but the bar for the sector has been lowered further.

Chip makers such as Advanced Micro Devices (AMD), which is due to report on Tuesday, are expected to underperform as PC sales shrink. AMD shares fell more than 10 per cent on Friday after disappointing results from its larger competitor, Intel. Still, a chip maker sector index posted its highest weekly close since last April.

Following a recent underperformance, an upside surprise from Apple on Wednesday could trigger a return to the stock from many investors who had abandoned ship.

Other major companies reporting this week include Google, IBM, Johnson & Johnson and DuPont on Tuesday, Microsoft and 3M on Thursday and Procter & Gamble on Friday.

Perhaps the strongest support for equities will come from the flow of cash from fixed income funds to stocks.

The recent piling into stock funds US$11.3 billion in the past two weeks, the most since 2000, indicates a riskier approach to investing from retail investors looking for yield.

"From a yield perspective, a lot of stocks still yield a great deal of money and so it is very easy to see why money is pouring into the stock market," said Stephen Massocca, the managing director at Wedbush Morgan in San Francisco.

"You are just not going to see people put a lot of money to work in a 10-year Treasury that yields 1.8 per cent."

Housing stocks, already at a five-and-a-half-year high, could get a further bump as investors eye data expected to support the market's perception that housing is the sluggish United States economy's bright spot.

Home resales are expected to have risen 0.6 per cent last month, data are expected to show on Tuesday. Pending home sales contracts, which lead actual sales by a month or two, hit a two-and-a-half year high in November. The new home sales report on Friday is expected to show a 2.1 per cent increase.

The federal debt ceiling negotiations, a nagging worry for investors, seemed to be stuck on the back burner after Republicans in the US house of representatives signalled they might support a short-term extension.

* Reuters