updated 6/28/2009 3:42:46 PM ET 2009-06-28T19:42:46

Markets have replaced big gains with little change.

Major Market Indices

Stocks entered a period of relative calm in recent weeks as a powerful spring rally born of optimism about the economy's revival began to sputter. With the second quarter wrapping up Tuesday and earnings reports looming next month, there appears to be little coming up in this holiday-shortened week that could exert a strong pull on the market one way or another.

Earnings reports and profit outlooks are sure to dictate market movements in the coming weeks. Some watchers are already worrying that poor news from those reports, which start rolling out in early July, could weigh down a market that had been buoyed by hopeful signs on the economy.

"Over the last couple of weeks, uncertainty has been building in how earnings will play out over the next four weeks," said David Goerz, chief investment officer at San Francisco-based HighMark Capital Management.

Key employment data due out Thursday is likely to have the biggest effect of any reports set to be released during the week, but even that reaction could be muted because investors are concerned about earnings more than anything else right now, Goerz said.

Earnings will give investors the best insight into whether the economy has actually bottomed and started what is expected to be a slow recovery. The market had reacted favorably to reports of improvement in consumer confidence, housing and manufacturing that suggested the economy's deterioration was slowing — now they get a chance to see if that moderation translated into better profits for companies.

Retailers' results will show whether consumers are heading back to stores and buying new goods. Financial firms' earnings will let investors know where the battered credit markets stand. And earnings from manufacturers will prove whether factories are ramping back up production.

Investors have become cautious ahead of these reports, which helped put a halt to the market's big springtime rally that resulted in sharp gains for every sector. The average industry sector-focused equity mutual fund has gained 21.1 percent since the end of March, according to data compiled by Lipper. The biggest gains were seen in international real estate funds, though all 20 sectors Lipper tracks saw increases of at least 10 percent.

Investors will be even more focused on companies' forecasts for future growth.

After eight quarters of downward revisions to corporate earnings' estimates and declining profits, analysts' are starting to predict improvements in profitability for 2010 and beyond as the economy stabilizes and normalizes, Goerz said. How high those revisions go could provide a new impetus for the market to restart its rally.

Despite the uncertainty and even if earnings are weaker than expected, a sharp drop in stock prices is unlikely, said Craig Hodges, president of Dallas-based Hodges Capital Management.

"There is a tremendous amount of money on the sidelines," Hodges said. "A lot of managers missed this rally. Any selloffs will be met with buying because their job is to put money to work."

Before earnings season kicks into high gear, investors will get a smattering of economic data this week, led by the Labor Department's June unemployment figures. Though a lagging indicator of the nation's economic health, the unemployment rate should provide valuable insight into whether the economy is stabilizing or rebounding.

"It's probably going to look better than it has the last couple of months," Goerz said, but the unemployment rate could move still higher. The jobless rate hit a 25-year high of 9.4 percent in May, jumping from 8.9 percent the previous month.

Economists polled by Thomson Reuters predict the unemployment rate rose to 9.6 percent in June.

Aside from the labor data, investors will also get new readings on consumer confidence and manufacturing.

June's consumer confidence figure, due out Tuesday, is expected to increase to 57 from 54.9, according to economists' polled by Thomson Reuters. Consumer confidence is considered a key indicator of whether the economy is improving since spending by consumers accounts for about two-thirds of U.S. economic activity.

In manufacturing, economists are predicting that the Institute for Supply Management's manufacturing index, due out Wednesday, improved to 44 in June from 42.8 in May.

Major indexes were mixed last week. The Dow Jones industrial average fell 1.2 percent. The Standard & Poor's 500 index dropped 0.3 percent, and the Nasdaq composite index rose 0.6 percent.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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