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Wall Street to turn attention to earnings results

Investors, whose optimism was recently shaken by surprisingly weak economic data, are now hoping companies can provide some clues about a recovery.
/ Source: The Associated Press

Investors, whose optimism was recently shaken by surprisingly weak economic data, are now hoping companies can provide some clues about a recovery.

Wall Street's focus this week shifts from economic reports to corporate earnings announcements and forecasts for the rest of the year. After investors were rattled last week by the latest consumer and employment data, there is growing uncertainty in the market about how strong the second half of the year will be.

Aluminum maker Alcoa Inc., the first of the 30 companies that make up the Dow Jones industrials to report second-quarter results, opens earnings season on Wednesday. Hundreds of other corporations will issue their reports during the next four weeks.

"From this point on, we're going to start talking a lot more about how the second quarter was and that is going to be the biggest market driver," said Scott Colyer, chief executive of Advisors Asset Management in Monument, Colo. "What we want to see is continued recovery."

Investor optimism has been tested by an increasing number of economic reports that show the recession is still taking a toll on businesses and consumers. Two of the biggest disappointments came last week, when the Conference Board said consumer confidence sagged last month, and the Labor Department reported that employers cut more jobs than expected.

The reports have investors questioning whether the market's spring rally — in which the Standard & Poor's 500 index soared nearly 40 percent from 12-year lows in three months — was justified. That rally was driven by a string of not-so-bad data and the belief that the economy's slide was slowing. Now investors are worried the economy's recovery won't be as quick and strong as hoped.

The S&P 500 has fallen 5.3 percent since mid-June, while the Dow has dropped 5.9 percent and the Nasdaq composite index is down 3.4 percent.

Still, the market had a stunning second quarter. All the major indexes finished the period with double-digit percentage gains, and the S&P 500 index had its best quarter in more than 10 years. It also was the first time the Dow and the S&P 500 logged quarterly gains since the third quarter of 2007.

Some analysts believe the problem in the market may not be the health of the economy as much as investors' expectations.

"This economy is starting to stabilize," said Burt White, chief investment officer at LPL Financial in Boston. "The market is looking for companies to do the same thing."

By selling stocks down last week — the Dow finished down 1.9 percent, the S&P 500 lost 2.5 percent and the Nasdaq fell 2.3 percent — investors may have signaled that they're now more pessimistic about companies' reports. But they may be still be more optimistic than earnings data and outlooks will justify.

"This is going to be a very challenging earnings season," said Jill Evans, co-portfolio manager of the Alpine Dynamic Dividend Fund. "In March, things were so dire. No number was too bad because expectations were so low."

In addition to Alcoa's numbers on Wednesday, investors will get reports from the Institute for Supply Management on the services sector during June and from the Commerce Department on last month's retail sales and wholesale inventories. A preliminary reading on consumer sentiment in July from the University of Michigan will be issued on Friday.

The report on wholesale inventories especially will be looked at closely, analysts said.

"Low inventories now mean future growth later," Evans said. "It will be interesting to see if those numbers continue to show low, lean, managed inventories."