Investors will be poring over the rush of earnings reports from titans like chip supplier Intel Corp. and computer maker International Business Machines Corp. this week for evidence that Wall Street's surge is justified.
"It's very hard to predict what is going to happen this coming week," said Hugh Johnson, chief investment officer at First Albany Corp. "It's clearly the big week. The outcome for the stock market will depend on what those CEOs say about prospects."
Investors have funnelled cash into stocks on mounting hopes the nation's economic recovery is gathering steam. The technology-stuffed Nasdaq has leaped more than 43 per cent so far this year, while the broad Standard & Poor's 500 has climbed about 18 per cent and the blue-chip Dow Jones industrial average has tacked on almost 16 per cent.
The rally has raised investors' expectations for the third-quarter earnings season. Although conglomerate General Electric Co. created some tension in the market on Friday by cutting its earnings outlook due in part to a tough economy, many market watchers are still betting on a solid crop of earnings reports.
Quarterly results will grab the spotlight this week. But investors will also be eyeing a string of economic reports on retail sales, manufacturing activity, consumer prices, weekly jobless claims and consumer confidence that could paint a clearer picture of the nation's economy.
This week marks the first of three hectic weeks of earnings reports. About 110 S&P 500 companies are expected to post quarterly results this week, 160 S&P 500 companies will report next week, and 90 S&P 500 companies will release their results in the third week, according to research firm Thomson First Call.
A decrease in the number of earnings warnings in the past year has fuelled investors' hopes for impressive results this earnings season. There were three negative outlooks for every positive outlook in the first quarter of 2003, two for every positive one in the second quarter, and 1.7 negative outlooks for each positive forecast in the third quarter, according to First Call.
"Earnings will totally be the focus during the week," said Ozan Akcin, chief market strategist at Puglisi & Co. "We're going to have a really good reporting season. We are going to see more than half the companies beat expectations. We should see a very good week."
Big names reporting this week include Intel, IBM, Bank of America, Johnson & Johnson, Merrill Lynch & Co., Motorola Inc., Apple Computer Inc. General Motors Corp., Advanced Micro Inc., Altria Group, Caterpillar Inc., Coca Cola Co., eBay Inc., Honeywell International and Sun Microsystems Inc.
"Up to this point, we have had earnings improvement based on cost containment," Mr Davidson said. "Investors will be looking at earnings with respect to their topline growth as indicators of strength of consumer demand, and they will also be looking at forward-looking statements."
Economic data next week should offer more clues on the sustainability of the economic upturn. The barrage of data will begin on Wednesday, with the retail sales report.
US retail sales for September are expected to edge down 0.1 per cent, versus a rise of 0.6 per cent in August. Stripping out autos, economists polled by Reuters see retail sales up 0.4 per cent in September, after rising 0.7 per cent in August.
A report on Thursday from the Philadelphia Federal Reserve Bank should provide an early snapshot of manufacturing conditions this month, while weekly jobless claims numbers on the same day could show further signs of an improving labour market.
Jobless claims for the week ended October 11 are expected to land at 388,000 after falling to 382,00 the week before. Economists say claims above 400,000 suggest a deteriorating job market, while claims below that signal improvement.
"Employment and capital spending are two components yet missing in this recovery. The statistics around those two numbers become more important," Mr Davidson said.
Thursday's data menu also calls for the US Consumer Price Index, a gauge of inflation at the retail level. The overall CPI is expected to have gained 0.2 per cent in September, after an increase of 0.3 per cent in August. Core CPI, which excludes volatile food and energy prices, is forecast at up 0.1 per cent in September, after a gain of 0.1 per cent in August.
The University of Michigan report on Friday will shed some light on consumer sentiment. Economists polled by Reuters forecast the index rose to 88 in October from 87.7 in September.