Stocks could break through to all-time closing highs next week, provided a resolution to the fiscal woes of Cyprus satisfies investors.
The island nation accounts for a fraction of euro zone economic output, and yet the wrangling over a 10-billion euro ($13 billion) bailout package kept markets on edge throughout this past week. The S&P 500 fell for the first time in four weeks, with weakness linked to uncertainty overseas.
The Cypriot ruling party said Friday that it was close to a deal to raise billions of euros in order to secure a bailout from the European Union to avoid a financial meltdown and a potential exit from the euro.
Euro zone leaders have offered the country 10 billion euros on the condition it raises 5.8 billion euros on its own. The rescue plan is smaller in scope than previous bailouts to euro zone members, making investors worry less about a banking collapse and more about the possibility Cyprus would exit the bloc and drop the euro currency.
The worry "is the psychological knock-on effect of the credible possibility of some (country) saying ‘Cyprus got out, now they are on their own, they devalued their currency, they don't have to go through austerity'," said Art Hogan, managing director at Lazard Capital Markets in New York. "What is going to stop Greece from doing the same thing? And you start a daisy chain."
Similarly, investors had reacted harshly to proposals by European officials to tax depositors - including those protected by depositor insurance - to fund the bailout. That sparked some selling on the idea that such a plan could set a precedent for dealing with other troubled euro zone economies, and set off bank runs across the continent.
Assuming Cyprus's troubles are solved, investors will turn their attention to economic data due during the holiday-shortened week, with equity markets closed on Friday for the Good Friday holiday.
The data will include orders for durable goods orders and pending home sales for February as well as the final reading of fourth-quarter gross domestic product.
But with the trend of economic data showing a slow improvement in the U.S. economy, few negative surprises are expected next week. That could enable the S&P 500 to once again make a run at its all-time closing high of 1,565.15. After all, for all of the worry about Cyprus, the S&P only dipped 0.3 percent this week and the benchmark index remains up more than 9 percent for the year.
"The story doesn't seem to be weakening and domestically it seems to be growing in terms of strength," said Sandy Lincoln, chief market strategist at BMO Asset Management U.S. in Chicago. "People are looking at a better backdrop, whether it is the jobs data, the GDP data or the consumer stepping up on the retail sales side in spite of fiscal drag."
Stocks could see another boost in the form of quarter-end "window dressing" in which money managers add outperforming stocks to their portfolios.
"You are coming into the end of the quarter, everybody has some great results. You are going to get some window dressing on some of the stocks that are doing well," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.With earnings season several weeks away, only nine S&P 500 companies are expected to report quarterly results next week, including discount retailer Dollar General Corp and video game retailer Gamestop Corp.
Only a few companies released results this week, but they were disconcerting. Oracle Corp, the world's No. 3 software maker, fell well short of revenue expectations. FedEx Corp, the second-largest U.S. package delivery company, cut its forecast for the year.
According to Thomson Reuters data, of the 491 companies in the S&P 500 that have reported quarterly earnings, 69 percent have topped analysts' expectations, compared with 62 percent since 1994 and 65 percent over the past four quarters.
A strong showing next week could push the index past both its record closing high as well as its record intraday high of 1576.09. But the index has faced stiff resistance in prior attempts to break the mark, climbing as high as 1,563.62 before losing steam. As more attempts to break the mark fall short, the likelihood of a bigger dip that many analysts have been expecting increases.
"Every time it gets up there, it seems to sell off, so you have to get through that resistance point," Mendelsohn said. "Once we get through that resistance point that will probably bring more buyers in. If you can't get through it, that will probably encourage some of the sellers a little bit."