After Friday's gains, can the rally push on?

By Charley Blaine and Elizabeth Strott

The stock market finished off Friday with a stealth rally that should give bulls a lot of cheer for the markets next week.

The Dow Jones industrials, down as many as 106 points in the late morning, finished with a 43-point gain to 12,892. The Standard & Poor's 500 Index finished up 9 points to 1,398, its best close since Feb. 1.

The Nasdaq Composite Index closed down 6 points to 2,423, but that decline was mostly due to Microsoft (MSFT, news, msgs), whose shares fell 6.2% to $29.83 after its earnings and forecast disappointed Thursday. (Microsoft is the publisher of MSN Money.)

That midday sell-off that sent the Dow to a short-lived triple-digit loss, was prompted by two factors:

• A report showing the weakest consumer confidence since the early 1970s.

• Reports that a U.S. cargo ship had fired at Iranian gunboats in the Persian Gulf. The reports set off a rally in the price of crude oil, which peaked at $119.55 a barrel before falling back to $118.52. That was still a gain of 2.1% on the day and 7.6% on the week. There also were reports of oil-supply disruptions in Nigeria.

But somehow, the market got past both issues.

At Friday's close, the Dow was up nearly 11% from its intraday low on Jan. 22. The S&P 500 and Nasdaq are up 11% and 12%, respectively, from their intraday lows on March 17.

While the three indexes remain 9%, 11% and 15%, respectively, below their peaks of last October, the recent rebound has generated lots of talk that the worst of the market downturn that began in October is over.

• Video: When will oil reach $125 a barrel?

The Federal Reserve has cut interest rates -- and is expected to cut them again -- and helped engineer the takeover of investment bank Bear Stearns (BSC, news, msgs) by JPMorgan Chase (JPM, news, msgs) without causing a collapse of the global banking system.

The S&P 500 Financial Sector is up nearly 16% from its closing low on March 17, the first day of trading after the Bear Stearns-JPMorgan deal was cut.

There are, however, plenty of critics who believe the stock market has not yet priced in the possibility of a nasty recession that takes longer than expected to get past.

Bears would argue that the U.S. housing market is a mess, especially after reports on existing-and new-home sales this week showed that inventories of homes for sale are showing no signs of declining.

• Jim Jubak: Don't trust this market rally

The markets for the week

	Close for week	Wk. ago close	% chg.	YTD. chg.
Dow Jones industrials	12,891.86	12,849.36	0.33%	-2.81%
S&P 500	1,397.84	1,390.33	0.54%	-4.80%
Nasdaq Composite	2,422.93	2,402.97	0.83%	-8.65%
Russell 2000	721.88	721.07	0.11%	-5.76%
Crude oil per barrel	$118.52	$110.14	7.61%	23.48%
10-yr. Treasury yield	3.87%	3.74%	3.29%	-4.19%
Gold per troy ounce	$889.70	$927.00	-4.02%	6.17%

More airline mergers coming

American Airlines parent AMR Corp. (AMR, news, msgs) has had early-stage merger talks with US Airways (LCC, news, msgs) and is in advanced talks for an alliance with Continental Airlines (CAL, news, msgs), sources briefed on the situation told Reuters on Friday.

News of the talks comes after Delta Air Lines (DAL, news, msgs) and Northwest Airlines (NWA, news, msgs) announced nearly two weeks ago they planned to merge to become the world's largest airline, seeking to counter skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel.

US Airways was up 1.4% on Friday to $7.16. Continental fell 2.6% to $17.22. AMR slipped 2.4% to $7.43.

Financial stocks have a good day

Nineteen of the 30 Dow stocks were higher on the day, with American Express (AXP, news, msgs) the leader, gaining 5.7% to $47.77.

Financial stocks and materials stocks -- metals, fertilizers and chemicals -- were the market leaders Friday.

American Express was the seventh-best S&P 500 performer as well. Microsoft was the loser among Dow and Nasdaq-100 ($NDX.X) stocks and the fourth-worst S&P 500 stock.

Mortgage providers Fannie Mae (FNM, news, msgs)and Freddie Mac (FRE, news, msgs) were up 9.9% to $30.80 and 7.3% to $27.95, respectively, the second- and fifth-best performers on the S&P 500.

Seed maker Monsanto (MON, news, msgs) and fertilizer manufacturer Mosaic (MOS, news, msgs) were up 5.5% to $125.48 and 7.3% to $131.30, respectively.

Gold miner Newmont Mining (NEM, news, msgs) added 4% to $44.73.

Next week will be dominated by the Federal Reserve's decision on interest rates, due Wednesday, and Friday's report on nonfarm payrolls. The Fed is expected to cut its key federal funds rate a quarter-point to 2.25%, possibly a half-point to 2%, to help the economy weather what increasingly looks like a recession. But the move could also weaken the dollar, which has made a comeback against the euro and other major currencies late this week.

In addition, the first-quarter earnings season will continue, with Big Oil taking center stage. Reports are due from Royal Dutch Shell (RDS.A, news, msgs) on Tuesday, ExxonMobil (XOM, news, msgs) on Thursday and Chevron (CVX, news, msgs) on May 2.

Friday's gains for the Dow and the S&P were their seventh in the past 10 sessions. The Dow finished the week with a gain of 0.3%. The S&P 500 was up 0.5% on the week, and the Nasdaq was up 0.8%. For the month, the Dow is up 5.1%, the S&P 500 5.7% and the Nasdaq 6.3%. If the gains hold, the averages would post their first monthly gains after five straight losses.

Oil, job worries make consumers edgy

The market had opened higher as the dollar continued to rise. It took a 100-point midday dip on news that the Reuters/University of Michigan consumer sentiment index fell to a 26-year low before rallying late.

The consumer sentiment index fell to 62.6 in April from 69.5 in March. Economists had expected a decline to 63.2.

"The recent acceleration in the loss in confidence indicates a longer and potentially deeper recession," according to Richard Curtin, the director of the Reuters/University of Michigan Surveys of Consumers. "Rising uncertainty about future living standards has caused consumers to adopt more prudent spending plans and become more wary of incurring new debt."

Consumer spending makes up about three-quarters of the U.S. economy.

• Video: Consumer sentiment falls

"Consumers are feeling the pinch, not only from the labor market, but also from prices," said Aaron Smith, an economist at Moody's Economy.com, to Bloomberg Television. "There's a squeeze on incomes from two sides."

Earlier this month, the Labor Department reported that the economy had shed 80,000 jobs in March.

Stimulus rebates start to arrive

There is some good news for consumers to consider: President Bush on Friday said rebates from the economic stimulus plan will start to arrive next week, ahead of schedule.

• Video: President Bush on the economic stimulus plan

"This money is going to help Americans offset the high prices we're seeing at the gas pump and at the grocery store," Bush said at a news conference.

The Treasury Department will give out $110 billion to about 130 million U.S. households over the next three months. Payments will be $600 for single tax filers who make less than $75,000 and $1,200 for couples making less than $150,000, with additional rebate money to families with dependent children.

Energy prices -- New York close

	Fri.	Thur.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$118.52	$116.06	$2.46	16.68%	23.48%
Heating oil (per gallon)	$3.3028	$3.2583	$0.0445	8.32%	24.66%
Natural gas (per million BTU)	$10.9630	$10.7900	$0.1730	8.53%	46.51%
Unleaded gasoline (per gallon)	$3.0537	$3.0186	$0.0351	16.72%	22.60%

Microsoft shares are the weak link

Microsoft offered a mixed picture for investors late Thursday and paid for it with a sell-off on Friday.

The tech giant reported fiscal-third-quarter earnings of $4.39 billion, or 47 cents per share -- an 11% decline from the $4.93 billion, or 50 cents per share, the company earned in the same period last year.

But while earnings beat The Street's estimate by 2 cents, sales of $14.45 billion missed analysts' expectations of $14.57 billion. The miss was due partly to a decline in revenue at the company's client division, which makes its Windows operating system: Sales there fell 23% to $4 billion. Sales at its business division, which makes Office software, declined 1.7% to $4.75 billion.

• Video: Inside Microsoft's report

Microsoft had difficult comparisons from last year, when its revenue got a boost from deferred profits from sales of its Windows Vista operating system. Revenue for Microsoft's entertainment division, which makes the Xbox video game console and the Zune music player, shot up 68% to $1.58 billion.

Things look good for next year, Microsoft said. The company said it expects earnings to rise between 13% and 18% in fiscal 2009, to between $2.13 and $2.19 per share on revenue of $66.9 billion to $68 billion. Analysts are estimating earnings of $2.10 per share on $66.5 billion in revenue.

Microsoft's outlook for the current quarter wasn't as robust. The company expects fiscal-fourth-quarter earnings of 45 cents to 48 cents per share; The Street expects earnings of 48 cents. Sales in the current quarter will be between $15.5 billion and $15.8 billion. The consensus estimate is for sales of $15.6 billion.

• Talk back: Do you trust the recent market rally?

Microsoft's report was an indication to some analysts that business spending on technology is slowing along with the overall economy. The software giant said sales of Windows for personal computers fell 24%.

On Monday, Citigroup (C, news, msgs) equity strategist Tobias Levkovich cautioned that the credit crunch would not spare the tech sector. "It is quite probable that such sales (of tech products) will take time to filter through bureaucratic organizations that simply are not in the mood to spend," Levkovich wrote in a note to clients.

Recent reports from Intel (INTC, news, msgs), Google (GOOG, news, msgs) and IBM Corp. (IBM, news, msgs) showed better-than-expected quarterly results and rosy forecasts for the rest of the year.

• Get free, real-time stock quotes on MSN Money

Many tech companies have been relying on strong international growth to help offset weakness in the United States. This year, companies may increase spending on technology by 6% in Asia and 3.9% in Europe, according to technology-research company Gartner Research. Tech spending is expected to rise only 2.3% in the Americas.

Continued: The clock ticks for Yahoo

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