updated 7/31/2005 4:47:57 PM ET 2005-07-31T20:47:57

Wall Street’s predictions of a summer rally were borne out in July, with stocks enjoying surprising gains thanks to good economic data and a solid earnings performance from corporate America. But as Friday’s losses illustrated, investors may be wondering whether stocks are due for a downturn.

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In the long term, the economy appears to be going strong and may not experience a previously expected slowdown in the second half of the year. But unless more evidence of robust economic and profit growth is offered in the week ahead, investors appear willing to cash in instead of taking any further risks.

Despite Friday’s losses, July was an outstanding month, with the Dow Jones industrial average rising 3.56 percent, the Standard & Poor’s 500 index climbing 3.6 percent and the Nasdaq composite index surging 6.22 percent. Yet the markets broke a four-week streak of gains last week with a middling, mixed performance that speaks to investors’ ambivalence.

Concerns over Fed's rates policy
The rally could continue as long as the economy still shows signs of growth and corporate earnings remain healthy. Even then, however, an overly strong economy could raise concerns about the Federal Reserve’s interest rate policy.

Steady economic growth virtually guarantees a continuation of the Fed’s slow, steady rate hikes through the end of the year. If the Fed goes too far, the economy’s growth could see an abrupt slowdown as business and personal loans become more expensive.

Last week, the Dow fell 0.1 percent, while the S&P edged 0.04 percent higher and the Nasdaq gained 0.23 percent.

Labor jobs report crucial
The Labor Department’s job creation report, due Friday, is a proven market-mover, and has the potential to single-handedly keep the summer rally afloat — or halt it for good. Economists predict the economy will have created 183,000 jobs in July, up from 146,000 in June.

This number has been difficult to predict in recent months, however, so investors will likely be somewhat lenient should the number be modestly higher or lower. In fact, a slightly lower number could be beneficial, reinforcing the notion that the economy continues to grow, but not at a pace that would trigger inflation.

Also this week, the Institute for Supply Management will release its closely watched manufacturing and service sector indexes. The ISM manufacturing index, coming out Monday, is expected to rise slightly to 54 in July, slightly higher than June’s 53.8 reading. A better-than-expected number is possible, however, as the Chicago Purchasing Managers Association index of Midwestern manufacturing showed strong gains Friday.

On Wednesday, the ISM services index is due out, and economists expect a slight decline to 61 from June’s 62.2 reading. A reading of 50 on both ISM indexes indicates growth and expansion.

Few market movers this week
With 370 companies within the S&P 500 already having reported earnings, there are still plenty of companies reporting in the week ahead. However, most major corporations have already reported, and few reports this week appear to be able to move the market substantially.

Procter & Gamble Co. could give investors clues Monday as to consumers’ spending appetite. The healthcare and personal goods manufacturer is expected to earn 55 cents per share, up from 30 cents per share a year ago. The stock has traded in a narrow range over the past year, but rose steadily through the July rally, closing Friday at $55.63, 10 percent above its 52 week low of $50.53 on Oct. 28, 2004.

The media sector will be closely scrutinizing the results from Pixar Animation Studios, which has been disappointed with DVD sales of “The Incredibles” and hopes to revive its fortunes with “Cars” next year.

The stock took a severe hit earlier this year due to the lagging DVD sales, falling 21 percent from its 52-week high of $54.57 on June 7 to close Friday at $43.01. The company, which reports its earnings Thursday afternoon, is expected to earn 11 cents per share, down sharply from 31 cents per share in the second quarter of 2004.

Auto, retail sales reports
The first week of any month sees the latest sales reports from automakers and the nation’s retailers, which often causes a surge in trading activity for those stocks.

Ford Motor Co., General Motors Corp. and DaimlerChrysler AG are all expected to release their sales figures on Monday, while retail companies will give out their monthly sales figures throughout the week, with the bulk reporting on Thursday.

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