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THE WEEK AHEAD

Earnings reports may reveal economic recovery's strength

Uncertain about how strong the second half of the year will be, Wall Street is hoping companies provide clues as to whether the market's spring rally was justified.

July 06, 2009|Associated Press

NEW YORK — Investors, whose optimism was recently shaken by surprisingly weak economic data, are now hoping companies can provide clues about a recovery.

Wall Street's focus this week shifts from economic reports to corporate earnings announcements and forecasts for the rest of the year. After investors were rattled last week by the latest consumer and employment data, there is growing uncertainty in the market about how strong the second half of the year will be.

Aluminum maker Alcoa Inc., the first of the 30 companies that make up the Dow Jones industrials to report second-quarter results, will open earnings season Wednesday. Hundreds of other corporations will issue their reports during the next four weeks.

"From this point on, we're going to start talking a lot more about how the second quarter was, and that is going to be the biggest market driver," said Scott Colyer, chief executive of Advisors Asset Management Inc. in Monument, Colo. "What we want to see is continued recovery."

Investor optimism has been tested by an increasing number of economic reports that show the recession is still taking a toll on businesses and consumers. Two of the biggest disappointments came last week when the Conference Board said consumer confidence sagged in June and the Labor Department reported that employers cut more jobs than expected.

The reports have investors questioning whether the market's spring rally -- in which the Standard & Poor's 500 index soared nearly 40% from 12-year lows in three months -- was justified. That rally was driven by a string of not-so-bad data and the belief that the economy's slide was slowing. Now investors are worried the economy's recovery won't be as quick and strong as hoped.

The S&P 500 has fallen 5.3% since mid-June, the Dow has dropped 5.9%, and the Nasdaq composite index has slid 3.4%.

Still, the market had a stunning second quarter. All the major indexes finished the period with double-digit percentage gains, and the S&P 500 index had its best quarter in more than 10 years. It also was the first time the Dow and the S&P 500 logged quarterly gains since the third quarter of 2007.

Some analysts believe the problem in the market may not be the health of the economy as much as investor expectations.

"This economy is starting to stabilize," said Burt White, chief investment officer at LPL Financial in Boston. "The market is looking for companies to do the same thing."

By selling stocks down last week -- the Dow dropped 1.9%, the S&P 500 lost 2.5%, and the Nasdaq fell 2.3% -- investors could have been signaling that they were becoming more pessimistic about companies' reports. But they may still be more optimistic than earnings data and outlooks will justify.

"This is going to be a very challenging earnings season," said Jill Evans, co-portfolio manager of the Alpine Dynamic Dividend Fund. "In March, things were so dire. No number was too bad because expectations were so low."

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At a glance

TODAY

Institute for Supply Management releases its services sector index for June.

TUESDAY

Treasury Department auction

WEDNESDAY

Federal Reserve releases consumer credit data for May.

President Obama attends the Group of Eight summit in L'Aquila, Italy, that begins today and ends Friday. He also leads a meeting on energy and climate.

Quarterly earnings report due from Alcoa.

THURSDAY

Retailers report monthly sales results.

Labor Department releases weekly jobless claims.

Commerce Department releases wholesale trade inventories for May.

Freddie Mac releases weekly mortgage rates.

House Financial Services subcommittee hearing on the role of the Federal Reserve in the president's proposed financial overhaul.

FRIDAY

Commerce Department releases international trade data for May.

House Financial Services Committee hearing on derivatives and the president's proposed financial overhaul.

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