Stock investors have celebrated surprisingly good results from corporate America in recent weeks, but Wall Street's euphoria may fade this week as investors take a closer look at the economy.
As the war in Iraq slips from radar screens, stock traders have turned their focus to prospects for the economy and corporate profits, searching for clues to whether a much anticipated rebound is finally taking place.
Along with the continuing flood of corporate America's earnings, Wall Street has a slew of key reports on the economy to sort through this week, including data on consumer confidence, the manufacturing sector and employment. A closely watched speech before Congress by Federal Reserve Chairman Alan Greenspan will also garner close attention.
While many reports on the economy are being brushed off as tainted by the war in Iraq, the stock market's super-charged rally in recent weeks has made it particularly vulnerable to bad news on the economic front, Wall Street pros say.
"The numbers, in general, should be improvements over prior months. The question is: Is it going to be enough improvement to satisfy the market?" said Benjamin Pace, managing director at Deutsche Bank Private Wealth Management.
This month alone, the Standard & Poor's 500 index has risen six per cent, the Nasdaq Composite gained seven per cent and the Dow Jones Industrial Average rose four per cent. From the 2003 low it hit in mid-March, the S&P 500 is up more than 12 per cent.
Jon Brorson, managing director of equities at Neuberger Berman, said: "We've had a pretty good move, and my guess would be that you're going to see a general downward move in the next week on profit-taking off the big jump we had since March.
"I would view this week as a consolidation and a springboard for perhaps higher gains in the market," he said.
Anxiety about the Severe Acute Respiratory Syndrome or Sars virus, which has killed at least 276 people worldwide, mostly in Asia, is just another reason for investors to be wary, analysts said.
Consumer spending has been a linchpin of US economic growth, and analysts say they will be looking to a key report on consumer confidence this week to help determine whether Americans will maintain their spending habits.
Economists in a Reuters survey predicted the Conference Board's Consumer Confidence index rose to 69.8 in April from 62.5 in March.
The Institute of Supply Management's manufacturing sector survey, however, is expected to show the beleaguered sector is still struggling. Economists on average forecast a rise in the index to 47.3 in April from 46.2 in March. A reading below 50 generally indicates contraction.
Lingering weakness in the US job market could also be a cause for concern on Wall Street. The government's monthly jobs report is expected to show on Friday that the economy lost 53,000 jobs in April, while the unemployment rate rose to 5.9 per cent from 5.8 per cent.
But Wall Street's optimists are likely to blame any weakness on the Iraq war, which whipped up uncertainty and kept many companies from hiring or making spending decisions, said Milton Ezrati, senior economic strategist at Lord Abbett & Co.
"We're back to fundamentals, but it's very hard to read the fundamentals because they all come from that period before the war situation was resolved," Mr Ezrati said. "So investors are loathe to make too big a bet on numbers they think are less than definitive."
On Wednesday, investors will also closely eye Greenspan's testimony on US monetary policy before the House Financial Services Committee for clues to the Fed chief's take on the economy's health.
A number of blue-chippers are set to issue their results this week, including fast-food chain McDonald's Corp., consumer products company Procter & Gamble, and chemicals company DuPont, media and entertainment company Walt Disney Co. and oil heavyweight Exxon Mobil Corp.
Canada's JDS Uniphase highlights the week's tech earnings reports. Also on tap to report are drugmaker Bristol-Meyers Squibb Co.; defense contractor Northrop Grumman, and ChevronTexaco, the No. 2 US oil company.
So far, the earnings season has come as a pleasant surprise for Wall Street, with many companies meeting or beating expectations for the first quarter. But critics say companies have been beating sharply lowered expectations mostly due to cost-cutting.
"Folks will continue to be a bit more skeptical on earnings until top-line numbers come back strong," said Richard Nash, chief market strategist at Victory Capital Management.
In addition, the outlook for corporate profits in the quarters ahead remains murky, a factor that could help keep the stock market's gains in check, analysts said.
Out of the S&P 500 companies that have issued forecasts for the second quarter thus far, just over half have warned that their earnings would be worse than expected, according to earnings tracker Thomson First Call.
"People are eventually going to switch from saying, 'Earnings in the first quarter did OK,' to, 'That's in the past, but what's going on in the future?'" Neuberger Berman's Brorson said. "You want to see some indications that things are improving - that we've had an upswing after the war."