Now Wall Street gets back to the day job

Markets Update: After over a month of watching the ding-dong battle between Washington and the White House, Wall Street can get back to what it knows best: Wall Street.

After over a month of watching the ding-dong battle between Washington and the White House, Wall Street can get back to what it knows best: Wall Street.

The first full week of earnings season is dominated by the financial sector - big investment banks and commercial banks - just as retail investors, free from the "fiscal cliff" worries, have started to get back into the markets.

Equities have risen in the new year, rallying after the initial resolution of the fiscal cliff in Washington on January 2. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.

An array of financial companies, including Goldman Sachs and JPMorgan Chase, will report on Wednesday. Bank of America and Citigroup will do so on Thursday.

"The banks have a read on the economy, on the health of consumers, on the health of demand," said Quincy Krosby, a market strategist at Prudential Financial in Newark, New Jersey. "What we're looking for is demand. Demand from small business owners, from consumers."

Investors were greeted with a slightly better-than-anticipated first week of earnings, but expectations were low and just a few companies reported results.

Fourth-quarter earnings and revenues for S&P 500 companies are both expected to have grown by 1.9 per cent in the past quarter, according to Thomson Reuters.

Few large corporations have reported, with Wells Fargo the first bank out of the gate on Friday, posting a record profit. The bank, however, made fewer mortgage loans than in the third quarter and its shares were down 0.8 per cent for the day.

The KBW bank index, a gauge of bank stocks in the United States, is up about 30 per cent from a low hit in June, rising in six of the last eight months, including January.

Investors will continue to watch earnings on Friday, as General Electric will round out the week after Intel's report on Thursday.

This week will also feature the release of a wide range of economic data.

On Tuesday retail sales numbers and the Empire State manufacturing index will be released, followed by CPI data on Wednesday.

Investors and analysts will also focus on the housing starts numbers and the Philadelphia Federal Reserve factory activity index on Thursday.

The Thomson Reuters/University of Michigan consumer sentiment numbers are due on Friday.

Jim Paulsen, the chief investment officer at Wells Capital Management in Minneapolis, said he expected to see housing numbers continue to climb.

"They won't be that surprising if they're good, they'll be rather eye-catching if they're not good," he said.

"The underlying drive of the markets, I think, is economic data. That's been the catalyst."

Worries about the protracted fiscal cliff negotiations drove the markets in the weeks before the ultimate January 2 resolution, but fear of the debt ceiling fight has yet to command investors' attention to the same extent.

The agreement was likely part of the reason for a rebound in flows to stocks.

US-based stock mutual funds gained US$7.53 billion after the cliff resolution in the week ending last Wednesday, the most in a week since May 2001, according to Thomson Reuters.

Markets are unlikely to move on debt ceiling news unless prominent legislators signal that they are taking a surprising position in the debate.

The deal in Washington to avert the cliff set up another debt battle, which will play out in coming months alongside spending debates. But this alarm has been sounded before.

"The market will turn the corner on it when the debate heats up," said Mr Krosby.

* Reuters