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US investors focus on second quarter

"I think the market is at a point where all the hopes for the second half of the year in economic growth and earnings improvement now need to be validated."

Dennis Ferro, chief investment officer of Evergreen Investments

Wall Street's three-month rally lost a little momentum this past week as investors began to focus on upcoming second-quarter earnings reports. Many wondered whether the numbers would be able to reinforce their notion that a solid economic recovery is under way.

Analysts say the reports -- not the earnings figures themselves, but companies' outlook on spending and investment -- could well determine the fate of the market's stunning advance.

"I don't think we will have anything dramatic in terms of earnings numbers," said Chuck Hill, director of research at Thomson First Call. "The hurdle that will make or break the rally is the comments about the outlook going forward."

He explained that analysts twice last year pushed back forecasts of a stronger economic rebound due amid tepid corporate outlooks. That could happen again during the second-quarter reporting season next month if businesses continue to issue cautious outlooks.

"If we're not seeing any real signs that things are starting to pick up on the earnings front, my concerns are rising that we may be in for more than the normal trimming of estimates," Hill said.

There was evidence of investor hesitation this past week even as the market continued to push moderately higher. Analysts said much of the gains have come on anticipation of a cut in interest rates when the Federal Reserve meets this coming Tuesday and Wednesday.

Indeed, after consistently shrugging off bad economic news for weeks, investors left stocks flat on a mixed consumer prices report Tuesday and then sent them moderately lower on profit warnings from Eastman Kodak and Clorox.

On Thursday, the three main stock gauges posted their biggest declines in a month on investor disappointment following a Philadelphia Federal Reserve report on manufacturing. Still, thanks to a 201-point rally on Monday, the main gauges were able to end the week higher.

Analysts said some pullbacks were expected given the market's recent runup, which was sparked in part by a wave of better-than-expected first-quarter earnings. Investors also are now looking for more evidence of a strong recovery by year's end.

"What was impressive with the first quarter was the extent of the beat," said Jack Caffrey, equities strategist at J.P. Morgan Private Bank. But he added, "the market is not cheap. ... I don't think you have people expecting a lot from the second quarter."

"The key is not how businesses do [in terms of earnings numbers]; it's what they're saying about how their businesses are doing," he said.

Indeed, First Call's current estimates for second-quarter earnings are for an 8 percent to 10 percent gain over the same period last year, a bit more modest than the surprising 11.7 percent increase in the first quarter.

Hill also said the companies' preannouncement warnings in the coming weeks are expected to be comparable to previous quarters, and thus won't be a very effective catalyst for the market until the actual earnings reports -- with their accompanying outlooks -- are released.

Dennis Ferro, chief investment officer of Evergreen Investments, agreed that until then, investors may see largely sideways trading.

"I think the market is at a point where all the hopes for the second half of the year in economic growth and earnings improvement now need to be validated," he said.

For the week, the Dow Jones industrials rose 83.63, or 0.9 percent. They closed Friday at 9,200.75.

The NASDAQ composite index had a weekly advance of 18.23, or 1.1 percent, closing at 1,644.72 on Friday. The Standard & Poor's 500 index had a weekly gain of 7.08, or 0.7 percent, finishing at 995.69.

For the week, the Russell 2000 index, the barometer of smaller company stocks, slipped 0.15, or 0.03 percent, closing at 449.56.

The Wilshire 5000 Total Market Index, which tracks more than 5,700 US-based companies, ended the week at 9,511.99, up 57.73 from the previous week. A year ago, the index was at 9,389.98.
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