Wall Street pushed to a series of new highs this past week after upbeat economic reports and stock upgrades bolstered investor confidence in a strong recovery.
But analysts say a key test of the market's advance, which included some remarkable multiday winning streaks, will come later this month at the start of the earnings warning season.
That's when investors will have a fuller sense of whether a solid rebound -- which they've long bet would happen in the second half of the year -- will finally come to pass.
"This is a market that wants to go up," said John Forelli, portfolio manager for Independence Investment LLC. "Momentum is building and ... it feels like investors are getting more confident."
"But in the next leg of the bull market, we need to see earnings expectations rising for the major companies," he said.
Winning streak
The three main gauges this past week pushed to levels not seen since mid-2002. The NASDAQ composite notched a seven-day win streak -- the longest since February 2000 -- while the Standard & Poor's 500 had eight winning days and the Dow Jones Industrials rose for five straight days.
Much of the gains came on brokerage upgrades of several companies, particularly in the tech sector, that raised investor expectations of stronger growth.
On Tuesday, for example, the NASDAQ broke through 52-week highs following upgrades of tech heavyweights IBM Corp and Dell Inc, as well as software maker Microsoft Corp.
On Wednesday, upgrades of Siebel Systems Inc and General Electric Co added to the good mood. The news helped overcome New York Attorney General Eliot Spitzer's announcement of a probe into the mutual fund industry over possibly illegal trading schemes that some analysts worried would rattle investor confidence.
And on Thursday, encouraging reports on productivity and factory orders, as well as positive outlooks from Procter & Gamble Co and Cisco Systems Inc, continued to push the market higher, defying many analysts' expectations of a market pullback after several days of rallies. A moderate decline finally came Friday following a tepid employment report.
"It's hard to doubt the economy is just going to get stronger," said Peter Dunay, chief market strategist at Wall Street Access, a New York-based brokerage firm. "The problem is the market has been so far ahead of the curve and pushed higher even before the economy did better, that it needs to see positive earnings to drive it higher."
Good outlook
So far, fewer companies have lowered their third-quarter outlooks than in previous years, with the current ratio of negative preannouncements to positive ones standing at 1.7, according to Thomson First Call. At the same time last year, that ratio was 2.2.
But Joe Cooper, research analyst at Thomson First Call earnings, cautions that outlooks for coming quarters, as well as companies' commitment to capital spending, remain critical given investors' higher expectations.
"Analysts are actually raising their earnings forecasts now for the third quarter," Cooper said. "A recovery is afoot. Just how widespread it is remains the question mark."
"With business investment in a drought, consumers have been left holding the bag," he added. "The focus has been on when the business side of the economy will turn back on."
Historical losses
Other risks also remain.
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