updated 4/23/2006 6:30:16 PM ET 2006-04-23T22:30:16

Investors will likely enjoy another round of solid earnings reports this week, but those numbers could be easily ignored as the market shifts its focus back to the economy.

Major Market Indices

Wall Street has so far been impressed by first-quarter earnings, most of which have managed to beat analysts’ lofty expectations. If this week’s earnings data are anything like the last, the market certainly will have reason to continue celebrating a successful start to the year.

But the market nonetheless has some obstacles to overcome. Investors’ optimism over a possible end to the Federal Reserve’s interest rate hikes was quickly spoiled last Wednesday by a bigger-than-forecast jump in consumer prices. This week, strong readings on labor costs and first-quarter gross domestic product could feed inflation fears and send the market sliding.

And crude oil that surged past a record $75 per barrel and gold prices standing at a 25-year high also pose a threat. Analysts say those growing inflationary pressures are all the more reason for the Fed to keep raising rates, which could drive down bond prices and cause investors to lose interest in stocks.

And so continues Wall Street’s uncertainty about the pace of economic growth and inflation. More skittish trading is expected as data-sensitive investors mull this week’s raft of earnings reports and anticipate what the Fed will say at its May 10 meeting.

Signals from the Fed that it is almost done raising interest rates helped the market rally last week, with upbeat earnings reports bolstering stocks’ gains. The Dow Jones industrial average rose 1.88 percent, while the Standard & Poor’s 500 index rose 1.72 percent and the Nasdaq composite index gained 0.72 percent.

Economic data
Among this week’s closely watched reports will be the Commerce Department’s preliminary reading of the first-quarter gross domestic product on Friday. Inflation-weary investors have been looking for signs of a moderating economy; however, economists expect GDP growth to rebound to 5 percent from 1.7 percent in the fourth quarter.

Another critical datapoint will be the Labor Department’s employment cost index for the first quarter, which is forecast to gain 0.9 percent after rising 0.8 percent in the prior period. Wage inflation is considered a major driver of increasing prices throughout the economy.

The Commerce Department on Wednesday reports new home sales for March, which gives Wall Street an assessment of whether rising mortgage rates have affected housing demand. Analysts currently predict new home sales will total 1.1 million, up slightly from 1.08 million the month before.

Elsewhere, both the Conference Board’s and University of Michigan’s consumer sentiment measures are expected to be nearly unchanged. Investors could also see another drop in weekly unemployment claims as hiring improves and the job market tightens.

Earnings
The second big week of the first-quarter earnings season brings reports from several more Dow industrials, including heavy equipment manufacturer Caterpillar Inc., financial services firm American Express Co., defense contractor Boeing Co. and energy interest ExxonMobil Corp.

Results from defense contractor Lockheed Martin Corp. are due before the opening bell Tuesday. Increased defense spending has given the stock a boost over the past six months, with shares climbing 32 percent from a November low.

Amazon.com Inc. reports after the close Tuesday, and Wall Street is expecting the online retailer’s earnings to fall to 12 cents per share from 18 cents a year ago. Amazon’s stock is 28 percent below its 52-week high of $50 in December.

Consumer products maker Procter & Gamble Co., also a Dow component, releases results before the opening bell Thursday.

Events
Investors may monitor comments from Fed governor Susan Schmidt Bies on Tuesday as they continue scouring for hints regarding the central bank’s opinion on economic growth and inflation.

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