Warnings about corporate earnings may rain down on Wall Street this week, along with economic reports that could strengthen market expectations the Federal Reserve will cut interest rates soon.
To cope, stocks may meander a bit or slip. After a string of mostly lacklustre economic data, a growing chorus on Wall Street expects the Fed to reduce rates again when it meets between June 24 and 25. There's not much room to cut after the Fed has slashed borrowing costs to 40-year lows.
That's why investors will pick apart reports on the May Consumer Price Index, a barometer of inflation at the retail level, plus housing starts and industrial production. The market will search for clues on the economy's health in the first-quarter current account deficit, June regional manufacturing and May leading US economic indicators.
Earnings likely to grab attention include: chipmaker Micron Technology Inc., retailer Circuit City Stores Inc. and investment bank Morgan Stanley.
But the Street could be swayed by major confessions that financial results will disappoint, especially after such dour news from heavy hitters like Nokia Corp., Texas Instruments Inc. and carmaker DaimlerChrysler AG.
"It's been an enormous rally," said David Dreman, chairman and chief investment manager of Dreman Value Management, referring to the three-month rally that has lifted the tech-laden Nasdaq nearly 30 per cent.
"We're probably out of the bear market and in a bull market, but I don't think the market will accelerate at those levels until earnings start to pick up. There's no sign of that on the horizon," added Mr Dreman, whose firm oversees $6.8 billion.
Paul Cherney, chief real-time market analyst at S&P MarketScope, agrees with Mr Dreman. He sees a sideways market, but believes the downside will be limited as money flows back into the market, helping to keep a floor under stocks on pullbacks.
A recent surge in volume "tells me people are coming off the sidelines and feeling more confident we've hit bottom," Mr Cherney said. "The greater risk is not being invested, even though we're probably not going to have a huge shot up on the upside."
Stocks are pricey, he said. The market - to push higher - needs absolute proof of a turnaround from either strong earnings or guidance, he added.
"It's earnings warning season, when companies fine-tune their guidance," he said. "But even if companies come out with bad news, it would only be a short term event because we've seen so much volume and new money coming into the market."
Before tomorrow's open, investors will sink their teeth into a hefty helping of May reports: CPI, housing starts, real earnings and industrial production.
Shortly after the start of trading on Thursday, the Conference Board will issue its May index of leading economic indicators. The index is expected to show a gain of 0.6 per cent after a 0.1 per cent rise in April, when it pointed to sluggish growth after the Iraq war.
Recent data showed few signs of real growth while Wall Street priced in a boom. That's why many now await a rate cut.
"With the 'soft spot' in the US economy seemingly still well entrenched, it looks more and more like the centre of gravity on the FOMC may have edged over the line separating a 1.25 per cent funds rate from a 0.75 per cent rate," Rory Robertson, strategist at Macquarie Equities, said in a note.