LOS ANGELES AND NEW YORK — Fear finally gave way to sustained hope on Wall Street in the last three months, lifting major stock indexes to their first quarterly advance in nearly two years.
Now, as the second half of the year begins, investors are looking anxiously for the battered economy to back up their burst of optimism.
Despite a modest decline Tuesday, stocks rallied broadly in the second quarter, pushing the benchmark Standard & Poor's 500 index up 15.2% in the period -- its largest gain for any quarter since 1998.
The Dow Jones industrial average, which fell 82.38 points, or 1%, to 8,447.00 on Tuesday, rose 11% in the three months.
Both the S&P 500 and the Dow had slumped for six straight quarters before the spring turnaround.
The second-quarter rally built on the rebound that began March 10, a day after the two indexes hit 12-year lows amid another wave of fear that the financial system would collapse.
When Armageddon never arrived, brave bargain-hunters began to jump back into the market. It helped that economic reports by late March began to suggest that things had stopped worsening.
What's more, the recovery in financial markets spread worldwide, reinforcing Wall Street's sense that the darkest days had passed.
Many foreign stock markets scored bigger gains than the U.S. in the second quarter. Hong Kong's main share index surged 35%, the Brazilian market jumped 26% and the German market rallied nearly 18%.
Investors also have been aggressive buyers of risky corporate junk bonds, while until recently exiting the relative haven of U.S. Treasury securities. The bellwether T-note yield ended Tuesday at 3.52%, up from 2.67% at the start of the quarter.
Still, in the U.S. and much of the world, stocks overall have made no net progress since early May. And trading volume on Wall Street has mostly trailed off the last two months, another sign that investors have lost interest -- or are worried that they're too late to the party.
Many market pros now cite the same major concern: that the economy may have gotten less worse, but not significantly better.
"All we have had until now is a pullback from the abyss," said Stuart Schweitzer, global markets strategist for J.P. Morgan's private bank in New York. "The data have perked up a little but there is minimal forward progress."
Doubts about the economy were reinforced Tuesday, when the Conference Board said its consumer confidence index fell to 49.3 in June from 54.8 in May -- the first drop since February.
That trumped a report showing that although U.S. home prices were down sharply in April from a year earlier, the rate of decline has slowed.
"We continue to run high job losses, the housing market is still in distress and consumers are emphasizing savings over spending in a dramatic way," said Joseph Battipaglia, market strategist at brokerage Stifel, Nicolaus & Co. in Florham Park, N.J.
"When you lift your head up and you look out to the future, you wonder what kind of growth you can expect in the economy and in profits."
Market optimists say the Obama administration's economic-stimulus program, and the unprecedented sums the Federal Reserve is pumping into the financial system, just need time to kick in.
"As they say, 'Don't fight the Fed,' " said Marc Pado, market strategist at New York brokerage Cantor Fitzgerald. "They've got an unlimited checkbook and they're writing checks."
Bulls also take heart that stocks have been able to largely hold on to their gains even in the face of rising oil prices. Near-term crude futures fell $1.60 to $69.89 a barrel Tuesday but were up $20.23, or 41%, in the quarter as commodity investors bet on rising global demand in the second half.
The stock market's strongest sectors in the quarter were consistent with the idea that investors have retained their faith in an economic recovery.
The technology-heavy Nasdaq composite index, which eased 9.02 points, or 0.5%, to 1,835.04 on Tuesday, rose 20.1% in the quarter and was up 16.4% in the first half. Tech companies could be prime beneficiaries of any rebound in business and consumer spending.
Transportation stocks, another economy-sensitive sector, also had a big bounce in the quarter. The Dow transportation index was up 20.5% in the three months.
Small-company stocks were standouts too. The S&P small-cap index rallied 20.6% in the period.
The challenge now will be for the economic data in the next few months to live up to bulls' expectations.
"The second half is going to be the most data-driven market we've seen" at least in this decade, said Nicholas Colas, market strategist at brokerage BNY ConvergEx in New York.
"We're going to have to see some actual turn" in the economic signposts, he said, and not just numbers that are less worse than they've been.
After the spring rally, Pado believes the market could hit turbulence soon, driving the S&P 500 index as low as 850, which would be a drop of 10% from its spring peak.
But he thinks the S&P could rise to 1,100 by year's end, driven by a rebound in corporate earnings. Because there is so much idle capacity in the economy, Pado said, "with even a modest increase in demand . . . you could end up with a significant increase in company profit margins."