After a stellar quarter in which the major market indexes racked up their biggest gains in years, many analysts see stocks trading flat to down in a narrow range this week when earnings warnings kick into high gear.
Optimism for a robust economic recovery in the year's second half has fuelled a fierce rally in stock markets in the past three and a half months.
But as the pace of warnings picks up over the next two weeks, the stock market may take a hit as more companies issue forecasts for the quarter that ends today, strategists said.
Though the bulk of corporate America does not report results until mid-July, the second-quarter earnings season officially starts on July 8, when Alcoa Inc. becomes the first Dow component to report its results.
Until then, investors will likely see many large-cap companies issue profit warnings that could cause the market to slide, said Ozan Akcin, chief strategist at Puglisi & Co.
"We'll probably see a lot of companies guiding estimates downward so they can beat them on the day they report earnings," and cause a short-term bounce in their stock price, Mr Akcin said.
However, "we're also probably going to have companies come out with genuinely bad news."
Stocks will likely trade sideways to slightly negative next week, Mr Akcin said.
After bidding up stocks on anticipation of an economic recovery, investors will start scrutinising company announcements and economic indicators.
So far, investors have mostly disregarded weak data as they bet on the economy improving later this year, but they won't be forgiving much longer, said John Caldwell, chief equity strategist at KeyCorp's McDonald Financial Corp.
"This rally we've had is being driven by tax cuts, the Fed's interest-rate cut, and the outlook for a recovering economy," Mr Caldwell said. "If we don't get that confirmation, we could start to undo the rise in stock prices we've seen."
Key economic data to be released this week include today's Chicago Purchasing Management Index, an influential measure of Midwestern manufacturing activity. Economists polled by Reuters predict the Chicago PMI will rise to 53.0 in June from 52.2 in May.
The Chicago PMI is closely watched for clues to the closely watched Institute for Supply Management report, a monthly index that gives a detailed look at the US manufacturing sector, due on Tuesday. The ISM index is forecast to rise to 51.0 in June from 49.4 in May, according to economists polled by Reuters. A reading above 50 indicates expansion.
"Getting back into an expansion mode (in manufacturing) is what a lot of people will focus on," Caldwell said. "A good ISM number will give people confidence about the economy. If it indicates contraction, it will be bad for the market. "
Stocks finished lower last Friday, which marked the end of the last full week of the second quarter, but they still put in their best showing in a long time.
Since the first quarter ended on March 31, the Dow Jones industrial average has gained 12.5 per cent, the broader Standard & Poor's 500 Index has risen 15.1 per cent, and the Nasdaq Composite Index has climbed 21.2 per cent.
It was the best performance for both the S&P 500 and the Dow since the last quarter of 1998, when the S&P 500 rose 20.9 per cent and the blue-chip Dow gained 17.1 per cent, according to Markethistory.com. For the Nasdaq, it was the best quarter since the fourth quarter of 2001, when the tech-laden index climbed 30.1 per cent.
Trading activity will likely be quiet due to the holiday-shortened week. The New York Stock Exchange and the Nasdaq markets will close early at 1700 GMT on Thursday and remain shut on Friday, July 4, in observance of the US holiday of Independence Day.
The low volume may exaggerate the magnitude of any swings in the market, traders said.