updated 5/4/2008 12:22:02 PM ET 2008-05-04T16:22:02

Wall Street goes into the new week in an upbeat mood, with investors growing more confident that the economy and the financial markets are heading toward a second-half recovery.

Major Market Indices

There’s been a steady stream lately of decent earnings reports and mostly benign economic data, and there’s a sense that the credit crisis that pummeled stocks since last fall is nearing an end. For the first time in weeks, there’s optimism that the government might have actually staved off a deep recession.

The U.S. consumer clearly isn’t that cheerful, judging from consumer confidence figures released last week, but traders and portfolio managers on Wall Street often get ahead of themselves, looking past any bad news and toward future profits. Analysts are a little more cautious.

“The market has cleared its hurdles, but the race isn’t over yet — we haven’t crossed the finish line,” said Chris Johnson, president of Johnson Research Group. “You’ll now start to see lots of money that will be migrating sector to sector because everyone has been waiting for this momentum.”

Johnson has a very bullish stance for stocks in the near term, calling for up to a 10 percent rise within the next four to six weeks. But, he’s also realistic — “markets have a tendency to be overbought really quickly.” That was one reason the Dow Jones industrials pared some of its gains on Friday, gaining 48 points after being up more than 100 earlier in the day and shooting up 190 in the previous session.

Slideshow: Our cartoonists tackle the skyrocketing price of gas, the recession and other business news of the week. The Dow gained 1.29 percent over the course of the week, the Standard & Poor’s 500 index ended up 1.15 percent, and the Nasdaq composite index rose 2.23 percent.

Johnson points out there are still some big obstacles that could stand in the way of the market extending its gains. Chief among them is the health of the consumer, whose spending habits account for more than two-thirds of the U.S. economy.

That means economic data and upcoming quarterly earnings from retailers will take on even bigger significance than usual. For example, investors are likely to focus on Walt Disney Co.’s earnings report Tuesday to determine the strength of sales at its U.S. amusement parks and of Disney products.

But they’ll also be looking at results from Cisco Systems Inc., which makes Internet routers and other wireless devices, when it posts results on Tuesday. And they’ll be looking for comments Tuesday from global bank UBS AG on the state of the credit markets. Fannie Mae, the government sponsored mortgage finance company, might give some perspective on the housing market.

The market will also get more economic data. If the numbers are good, the Federal Reserve is more likely to pause in its campaign of lowering rates — a move that would allow the central bank to combat inflation and boost the anemic dollar.

“We’re slow growth, but not imploding,” said Steven Goldman, chief market strategist at Weeden & Co. “For the market, just like any patient that is ill, time heals. We’re getting some confirmation of this, but we’re still not entirely certain — there’s hope and expectations that the worst is over.”

Among the reports scheduled this week, the Institute for Supply Management on Monday releases its April reading on the service sector. The index is expected to come in at 49.3, according to economists surveyed by Thomson Financial/IFR. That would indicate a slightly larger contraction in activity than March’s reading of 49.6.

The Labor Department on Wednesday reports on first-quarter productivity and labor costs. Productivity is expected to have risen at an annual rate of 1 percent, while labor costs — one indicator of inflation — are expected to have increased by 2.5 percent.

Also Wednesday, the National Association of Realtors releases its pending home sales index, which is expected to have fallen to its lowest level ever in March, while the Federal Reserve reports on consumer debt in March.

On Friday, the Commerce Department reports on international trade in March, data that should provide insight into how the weak U.S. dollar has affected the nation’s imports and exports. Economists are expecting a decline in the trade gap.

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