updated 5/22/2005 4:28:53 PM ET 2005-05-22T20:28:53

Optimism returned to Wall Street last week, with solid economic data and falling oil prices giving the stock market its strongest week of 2005.

Major Market Indices

But it’s far too early to be celebrating. The skittishness and worries that plagued investors over the past six weeks are still there — pushed beneath the surface, but still there regardless. And those worries are only a single piece of bad news away from resurfacing.

Two potentially market-moving takes on the economy are due out in the week ahead. On Tuesday, the Federal Reserve releases the minutes of its May 3 meeting, and investors will look closely to see how the Fed governors feel about inflation and the strength of the economy.

The following day, the Commerce Department releases its estimate for the nation’s gross domestic product for the second quarter. The GDP, a measure of all the goods and services produced in the United States, was surprisingly sluggish in April’s reading, and the 3.7 percent annualized growth expected this month could be too ambitious.

However, even if the markets drop on both reports, the gains of last week will be tough to erase in a handful of trading sessions. Fueled by positive economic data and sharply falling oil prices, stocks had a big week. The Dow Jones industrial average climbed 3.27 percent, the Standard & Poor’s 500 index rose 3.05, and the Nasdaq composite index was up 3.52 percent.

Economic data
The GDP release will be Thursday, before trading begins. In the first take on second-quarter GDP, issued in April, the nation’s economy grew at an annualized rate of 3.1 percent, far less than the 3.5 percent Wall Street expected. This time, with strong earnings and falling oil prices, analysts anticipate much stronger growth.

On Wednesday, the Commerce Department will report on April’s orders for durable goods — big-ticket items designed to last up to three years. Orders are expected to rise 1 percent after March’s unexpectedly large drop of 2.3 percent.

Existing home sales data from the National Association of Realtors comes out Tuesday, with the Commerce Department reporting on new home sales Wednesday. Home sales and new home construction have surged in the past two months — a sign that the Fed’s interest rate policy hasn’t caused a drop-off in mortgage lending — and investors will look to see if the trend continues.

Halfway through the second quarter, there are few companies reporting earnings in the week ahead. However, the retail sector — which remains sensitive to consumer spending trends — will look closely at Costco Wholesale Corp.’s report, due Thursday morning, in hopes of finding strong sales and a bullish outlook for future profits. Costco shares closed Friday at $44.96, up 13.9 percent from their 2005 low of $39.48 on April 22. The company is expected to earn 42 cents per share for the quarter, up from 41 cents per share in the year-ago quarter.

Also Thursday, luxury home builder Toll Brothers Inc. reports its results, and is expected to earn $1.79 per share, sharply higher than the 95 cents posted last year. Toll Brothers has been a steady climber over the past year, more than doubling from its 52-week low of $36.92 on May 20, 2004, to close Friday at $84.48. Concern about interest rates, however, has pressured housing stocks recently.

The Fed minutes come out on Tuesday at 2 p.m. EDT. If past releases this year are any indication, expect stocks to fluctuate in the minutes after the release as traders react nearly sentence-by-sentence. It’s generally taken about a half hour or so for the markets to settle on a direction after minutes are released.

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