Market outlook mixed for next week; Economy slows

As an extremely strong month draws to a close, stock investors are in a bit of a pickle.

On one hand, there are many reasons to keep the rally going. On the other hand, the rally's been going so long, it might be time to step back.

Strong earnings, low oil prices and the likelihood that the Federal Reserve is done raising rates for now should all keep equities buoyant. But countering that is the reality of the slowing economy and the threat that it poses to corporate earnings.

"The economy is slowing and it will begin to undermine earnings," said Ned Riley, chief investment strategist at Riley Asset Management. "But the market may have already accounted for that and seems to be focused on other things."
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Riley said that in the short term, stocks should be able to keep pushing higher, particularly if this week's economic and earnings news proves supportive. (See charts for details).

"We're still in the earnings period, and that will continue to be the main driver in the short term," said Brett Gallagher, head of equities at Julius Baer. "We've had strong results and the market has reacted well, as expected."

However, "technically, we're overdone," Gallagher said, referring to the fact that on a technical market level, stocks are probably due for a retreat - and one that's bigger than Friday's selloff. This tug of war between the strong fundamentals and the likelihood of a pullback could keep markets choppy in the near future, he added.

That was certainly the case last week, where stocks rallied for four days straight, only to do an about-face Friday, after a report showed economic growth in the third quarter slowed far more than expected, due largely to the slowing housing market.

While the selloff no doubt unsettled some investors, it certainly wasn't surprising.