updated 2/16/2004 4:29:52 PM ET 2004-02-16T21:29:52

With fourth-quarter earnings reporting season nearly over, Wall Street will seek guidance this holiday-shortened week from a handful of economic reports. While most investors don’t expect the stock market’s mildly upward bias to be interrupted, any nasty surprises could send stock prices into negative territory.

Major Market Indices

Much of the market’s ascent in recent months has been driven by a stellar fourth-quarter earnings season. With more than 400 of the companies in the Standard & Poor’s 500-stock index having reported their quarterly results, about two-thirds of them have beaten Wall Street’s consensus expectations, on average by about 5 percent, which is above the historical average.

But with the broader stock market up 43 percent in an amazing rally over the last 11 months, Wall Street is wondering what the next catalyst that drives the market higher will be. Some market professionals like David Briggs, head of global equity trading at Federated Investors, think the stock market may struggle to move much higher over the next few weeks.

“It makes sense to be in this market,” Briggs told CNBC on Friday afternoon. “But I wouldn’t put any new money to work because I think we’ll be stuck in a ‘catalyst void’ until at least early March.”

A catalyst is sought
With stocks up so high, many Wall Street strategists have been looking for a correction in prices noted Briggs. But the market’s lack of direction over the last month has served as a correction, he noted. “The market is correcting, but we’re not seeing a price decline — it’s a sort of sideways correction like the one we saw last June and July.” Video: Latest market news

Peter Dunay, chief market strategist at brokerage Wall Street Access, thinks the market may now make more modest gains for the next few weeks. “The trend continues to be pretty good, but the momentum is slowing down,” he said. “Just look at the way the Dow is performing — up about 35 points for the week. That’s the sort of performance I’m expecting to see.”

A boost for stocks could come from last week’s announcement of cable operator Comcast’s unsolicited $54-billion takeover bid for media giant Walt Disney. The deal, which would create the world's largest media company, stirred up speculation about a comeback in corporate deal-making and put Wall Street on watch for the next mega-marriage.

When a company does a takeover deal is suggests a degree of optimism in its boardroom, noted Dunay. “This is going to give an overall boost in confidence to the market,” he added.

A worry for Wall Street in recent months has been that the U.S. Federal Reserve may soon opt to raise its key federal funds rate — the rate that banks charge each other for overnight loans — from its current four-decade low to a more neutral level. Low interest rates benefit corporations by keeping borrowing costs down.

But last Wednesday Fed Chairman Alan Greenspan chased away fears of a rate hike when he told Congress that the U.S. economy is growing vigorously and suggesting that no interest-rate hike is imminent. The news drove the Dow Jones industrial average up 124 points to a 32-month high by the close of trading.

Still, while Greenspan painted a rosy picture of the economy, after a substantial rally in stock prices concerns have mounted that most of the good news about the economy is already factored into the market. With this in mind, some strategists like Dunay worry that a precipitous decline in the U.S. dollar, or signs of an unexpected rise in inflation, may, in the long term, lead the Fed to raise rates sooner than it would like.

“We know that rates are going up in the near term because the Fed wants to see some employment growth first, but the risk is that something bad happens and the Fed is forced to raise them too early,” Dunay said. Inflation is dormant, so the fed still has room to keep rates low, he added, but strategists will pay closer attention to inflation data in coming months.

Fresh data in focus
This week, two separate reports on consumer and producer-level inflation in January are likely to show inflation remains quiescent. Other economic data of note this week include reports on industrial production and capacity utilization in January, region reports on manufacturing in New York and Philadelphia. Data on weekly jobless claims will also garner some attention.

“The week will not be as eventful as the last two weeks, but the market will be watching a couple of indicators: industrial production is likely to be strong, and so are the regional reports on manufacturing – they should come in at quite high levels and remind us that the economy doing well,” said Steve Stanley, an economist RBS Greenwich Capital.

Earnings reports are expected this week from a handful of firms including Wal-Mart Stores, the world's biggest retailer, and the second-largest U.S. discounter, Target. High-tech names like semiconductor firm Applied Materials and PC-maker Hewlett-Packard will also report, as will German-American auto maker DaimlerChrysler AG, electronics retailer RadioShack and telecom gear firm Qwest.

Stocks slumped last Friday, as investors fretted over a dip in a key consumer confidence measure and news that the U.S. trade deficit has hit an all-time record high. The broader market managed a second straight weekly advance, rising 0.3 percent, but the tech-rich Nasdaq composite index fell for a fourth straight week.

The U.S. financial markets will be closed Monday in observance of President's Day.

Reuters contributed to this report

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