updated 2/1/2004 6:36:45 PM ET 2004-02-01T23:36:45

Corporate earnings results will remain Wall Street’s main focus this week, as investors sift through another batch of quarterly scorecards. But Wall Street will also focus on a few key economic reports, as fourth-quarter earnings season winds down, shifting the stock market’s attention back to the economy.

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With 316 of the companies in the Standard & Poor’s 500-stock index and all but six of the 30 blue-chip companies in the Dow Jones industrial average having already reported results, earnings season is shaping up to be the best Wall Street has seen in 10 years.

But Wall Street has already anticipated a banner earnings season, as evidenced by a sturdy rise in stock prices over the last few months. Now, with the bulk of earnings in Wall Street’s rearview mirror, investors will turn to the economy for guidance, according to analysts, with the first key report coming this Friday when the government releases its January jobs report.

"The stock market is about to enter a period of limbo,” said David Joy, capital markets strategist at American Express Financial Advisors.

“Wall Street will start to focus on economic reports from now on and we’ll go back to debating whether the economic recovery can sustain itself.” Joy added. “And a critically important component of all this will be whether we can start to create jobs.”

January jobs data critical
Friday’s jobs report will be one of the most important economic report that Wall Street has seen for quite some time said Steve Stanley, an economist at RBS Greenwich Capital.

With most other sectors of the economy strengthening, Wall Street is eager for evidence that the current economic recovery isn't turning out to be a jobless one. In late 2003, Wall Street was upset by a disappointing November employment report, and stunned in early January when December's report showed the U.S. economy created only 1,000 new jobs.

“After November’s report came we expected to see a markup in job growth in December, so expectations were very high,” said Steve Stanley. “But what we saw in December was almost no job growth at all, so people came to believe that the month was an aberration, and now everyone expects January’s report to make up for December.”

Stanley expects job growth in January to be over 200,000. “But it’s very possible we could be disappointed again,” he noted. If so, Wall Street will start to question whether economic growth can be sustained, he said. “It’ll totally change our outlook, but then again if the number is above 200,000 people are going to jump to the conclusion that interest rates are going up again soon, and that might have a negative impact on stocks.” Video: Latest market news

Stocks dropped last Wednesday after the U.S. Federal Reserve appeared to prepare for an imminent rise in interest rates.

At its January policy meeting, the Fed kept its target interest rate for federal funds at the very low level of 1 percent, but tweaked the language used to describe its stance on monetary policy, dropping its pledge to keep rates low for a “considerable period.”

Investors have reaped the benefits of low rates on consumer spending and corporate profits. But a sell-off might be just what overvalued stocks need now according to Peter Dunay, chief market strategist at brokerage Wall Street Access.

“The market needed to correct a little bit -- the expectations were ridiculously high,” Dunay said. “Assuming the economics continue to look decent, the market will be able to continue to move up. But it needs to pull back a little to do that.”

Other important data due this week include reports on U.S. motor vehicle and chain store sales, and the Institute for Supply Management’s manufacturing index, due early Monday. After a softer-than-expected report on durable goods last week, softness in manufacturing might call into question the recovery’s strength, said Steve Stanley.

Rally's leadership changing
As Wall Street turns its attention to the economy, the nature of the rally that has driven stock prices up over 40 percent in a 10-month rally will change, according to David Joy.

To date, cyclically-sensitive stocks like technology stocks and smaller-capitalization shares have led the market’s advance, boosted by the extremely low cost of capital.

But as the rally “matures,” said Joy, and “as the likelihood of an interest rate rise grows, we’ll see more stable companies with more stable balance sheets take the lead,” he said. “We are advising our clients to prepare for that situation and look at companies that can do well when the going gets a little tougher; companies with proven track records.”

Joy said he expects to see larger-cap stocks take the rally’s leadership role, and companies that pay a dividend. “We’ll see some of the sectors that have been left behind in the rally take the lead, like healthcare, energy, consumer staples and financial stocks.” he said. “It doesn’t mean the rally will be snuffed out, it’ll just have a higher quality.”

Earnings reporting season continues this week, with 72 companies in the S&P 500 index due to release quarterly results.

The list includes names like high-tech bellwether Web equipment maker Cisco Systems, German-American auto maker Daimler Chrysler, military contractor Northrop Grumman and Dow component International Paper, which reports its results on Monday morning.

A consensus of analysts polled by earnings research firm Thomson/First Call expects fourth-quarter earnings to rise 26.4 percent from the same period a year before. “We’re still expecting to see the quarter grow by at least 27 percent, and that would make it the best quarter since the third quarter of 1993,” said Joseph Cooper, an analyst at Thomson.

Particularly heartening for Cooper is the fact that the margin by which companies are beating quarterly earnings estimates is still at an elevated level.

“The historical level average is 3 percent and this quarter we’re seeing companies beat by 5.5 percent – that’s nearly double,” Cooper said. “It’s something we’ve seen all through 2003 and it’s down to companies giving conservative guidance and seeing stronger demand than expected.”

Stocks slipped last week, pressured by profit-taking and indications mid-week that the Federal Reserve may be one step closer to a rate hike. For the week, the S&P 500 index, a broad market measure, slipped 0.9 percent, the Dow fell 0.8 percent and the Nasdaq Composite index dropped 2.7 percent.

Reuters contributed to this story

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