After a rally of almost seven months, stock investors will search earnings reports anxiously this week for signs that companies are seeing a pick-up in demand.
Today kicks off the busiest week in corporate America's earnings season. Roughly one-third of the Standard & Poor's 500 companies are due to issue financial results, including industry heavyweights Citigroup, Microsoft, 3M, Merck & Co. and AT&T.
Most investors anticipate a solid batch of earnings reports, and many are betting that a few standouts will carry the market higher this week. But even as the economic data points to a strengthening economy, some are worried that the stock market has already priced in a big economic recovery.
"Companies are not only meeting analysts' expectations but beating them, and if that happens, we'll have a really good week," predicted Ozan Akcin, chief market strategist at Puglisi & Co. in New York.
Among the companies that have reported results so far, revenue forecasts have been encouraging, and a surprisingly large number have posted results that beat Wall Street forecasts, Mr Akcin said.
Investors have poured cash into the stock market on mounting hopes that the US economic recovery is gaining steam.
Stocks ended lower on Friday, but all three market indexes have still racked up significant gains since March 11, when the market hit its lows for the year.
So far this year, the blue-chip Dow Jones industrial average is up almost 17 per cent, while the broader Standard & Poor's 500 index has risen 18 per cent. The technology-laden Nasdaq Composite index has climbed 43 per cent.
To justify stocks' hefty gains in recent months, investors say companies will not just have to beat estimates, but also deliver upbeat forecasts to reassure Wall Street that a long-sought pick-up in demand is really under way.
Many investors say they will be taking an increasingly hard line when it comes to companies' outlook about future performance. In particular, investors are keen to see a rise in revenue. Top-line growth in is seen as key to better earnings in the future and a stronger economy capable of creating new jobs - still a soft spot in the recovering economy.
"Investors are going to even hone in more sharply on fourth-quarter guidance, especially in the technology sector, that economic and business conditions are starting to improve," said Frederic Dickson, head of retail research at brokerage D.A. Davidson & Co. in Lake Oswego, Oregon.
"Those that hit their earnings targets, but fail to materially lift their guidance may run into some pressure," Mr Dickson said.
Online auction company Ebay Inc. felt Wall Street's disappointment on Friday. Its shares fell sharply after it gave a forecast for next year that failed to top analysts' bullish expectations, even though it also said its quarterly profits soared 70 per cent.
And on Thursday, investors punished shares of International Business Machines Corp. after its chief executive said the technology sector had not yet bounced back, even after IBM reported earnings per share in line with analysts' forecasts.
Though most companies are expected to meet or exceed their earnings targets, "the tone of expectations coming in from corporate America, with few exceptions, has been muted so far," Mr Dickson said. "Because of that, I would say we could be in for some consolidation."
Of course, the stock market could also take a hit if one or more leading companies misses Wall Street's earnings targets.
But since most executives usually take care to manage Wall Street's expectations to ensure that they can meet analysts' targets, Wall Street is betting corporate America will dish up some impressive results this earnings season. So far, analysts have pegged an 18 per cent increase in third-quarter earnings for the S&P 500 over the year-ago period, according to Thomson First Call, though the market research firm expects the earnings increase will eventually land closer to 21 per cent. For the fourth quarter this year, analysts have forecast an even more bullish 22.3 per cent.
In any case, analysts expect stocks this week will stay resilient even in the face of any negative earnings surprises.
"Investors are starting to take a more realistic view of what their expectations are relative to what companies are saying," Mr Dickson said. However, "there's still a lot of money sitting on the sidelines, waiting for small dips to put it to work," Mr Dickson said. "I'm not looking for a big dip."