Surging Wall Street faces earnings season test

After putting together a remarkable four-week winning streak, Wall Street faces a new test of its rally in the coming week with the opening of earnings season.

Although the market has been lifted by optimism that the worst crisis since the Great Depression is easing, the news from corporate America may provide clues about whether and when recovery is coming, say analysts.

The Dow Jones Industrial Average climbed 3.1 percent in the week to Friday to close at 8,017.59, capping four sizzling weeks that added some 22 percent to the blue-chip index.

The Standard & Poor's 500 index advanced 3.25 percent to 842.50, capping a 24 percent gain from lows hit March 9.

The tech-heavy Nasdaq powered higher by 4.96 percent on the week to 1,621.87.

The market managed to shrug off weak economic news in the past few sessions, amid a growing consensus that the worst may be over.

"While the economic news continues to be awful, recent news, including the small incremental bump in auto sales, factory orders and (a purchasing manager survey on) manufacturing, are leading many investors to believe the end of the economic recession is finally coming into sight," said Fred Dickson, chief market strategist at DA Davidson & Co.

"We are holding to our view that the rate of decline in the economy is beginning to slow, leading us to believe the economy has a good chance of bottoming out this summer."

Dickson said the rally has gained momentum as short sellers scramble to take profits and cover positions, and money managers with big cash positions "are becoming more nervous about missing the normal big early cycle move that traditionally leads an economic recovery."

But he said a key test will be upcoming with first-quarter earnings reports that will begin to hit the tape over the next few days.

"That will be a real test to see if the current rally is just a technical rally within the overall context of an ongoing bear market or the first leg of a new bull market," he said.

"Investors are very focused on what the economy will do in the second and third quarters," said Hugh Johnson at Johnson Illington Advisors.

"To get an idea of what the economy and earnings will do you have to look carefully at these earnings reports."

Many reports will be dismal but a key factor will be how companies see demand and whether they retrench further or gear up for better times.

In the coming week, Tuesday's quarterly report from aluminum giant Alcoa provides the traditional kickoff for earnings season. Earnings will get into full swing in the following week with results from key firms such as Google, Citigroup and General Electric.

Analysts said the market took in stride Friday's report showing a rise in the unemployment rate to 8.5 percent as 663,000 jobs were shed.

Douglas Porter, economist at BMO Capital Markets, said the view looking forward is not as bleak as in the rear-view mirror.

"Employment will be among the last major indicators to turn the corner," he said.

"First, sales must revive, and then be sustained, then business will try to squeeze more out of remaining employees, then add hours to the workweek, and only then add to payrolls. So, even as jobs spiral lower, another broad array of indicators this week suggested that the howling recession winds may be easing a touch."

Aaron Smith at Economy.com said the latest payrolls report was consistent with a 6.0 percent drop in US economic activity in the first quarter, which is terrible but not as bad as the 6.3 percent pace of decline in the fourth quarter.

"Economic data, growth momentum and policy have turned more supportive for equities," he said. "The next big hurdle will be first-quarter earnings due out over the next several weeks."

Bonds fell sharply for the week on improved appetite for stocks. The yield on the 10-year US Treasury bond rose to 2.907 percent from 2.761 percent a week earlier and that on the 30-year bond increased to 3.721 percent from 3.618 percent. Bond yields and prices move in opposite directions.