Resurgent Wall Street to be tested by earnings, Fed

NEW YORK: A suddenly resurgent Wall Street, riding a wave of economic optimism, faces challenges in the coming week with a slew of earnings reports and a detailed Federal Reserve outlook.

The market staged a powerful rally in the past week, helped by upbeat results in the first in a series of corporate earnings releases and an upwardly revised economic outlook from the central bank.

But investors will be looking for signs to reinforce their optimism, and will scrutinize dozens of corporate updates as well as the semiannual economic report to Congress and comments from Federal Reserve chairman Ben Bernanke.

Over the past week, the Dow Jones Industrial Average shot up 7.33 percent over the week to Friday to 8,743.94, ending a four-week losing streak for blue chips.

The broad-market Standard & Poor's 500 index leapt 6.97 percent to 940.38 and the tech-heavy Nasdaq rallied 7.44 percent over the week to 1,886.61.

After several weeks of consolidation and hesitation, the market was energized by generally strong earnings from the banking sector that suggested a healing in the financial system critical to recovery.

Also fueling the rally was Wednesday's release from the Fed of its updated economic forecast, showing a likely end to the economic slump this year despite a rise in its unemployment outlook.

Bernanke appears in Congress on Tuesday to offer more details on the Fed outlook, but many analysts are saying they see the end of the recession in sight.

Al Goldman, chief market strategist at Wells Fargo Advisors, said the dramatic rally came with many market participants caught short of stocks and rushing to get in on the rally.

"So many were caught on the wrong side of the market and couldn't stand the pain any longer," he said.

"Better-than-expected earnings and forward comments have helped the mood and will continue to be a positive for the market the rest of the year."

Fabio Folis at Barclays Capital said the market will focus on Bernanke, and that the Fed chairman will "sound a more upbeat note on growth and inflation in his semi-annual testimony" and will provide hints on the Fed's exit from its so-called "quantitative easing" or buying up Treasury bonds to keep rates low.

"We think he will lay the groundwork for the Fed to stop buying Treasury securities once it reaches the current 300-billion-dollar limit," Folis said.

But the analyst said the Fed chairman will stress ongoing support for the recovery: "With unemployment expected to stay high in coming quarters, the federal funds rate is likely to stay low for an extended period."

Dina Cover, economist at TD Bank, said the markets also want to see how the Fed will manage the recovery in withdrawing its massive economic stimulus effort without sparking inflation.

"The bigger issue for the Fed now is preventing a rapid increase in inflation expectations," she said.

"The Fed must clearly communicate its exit strategy in order to manage expectations, and this may be a difficult task to achieve."

Also to be closely watched are earnings reports from key firms in the coming week including Caterpillar, Coca-Cola, Apple, Wells Fargo, Boeing and Yahoo!.

The past week's reports from firms including Google, JPMorgan Chase and Goldman Sachs have torn past expectations, prompting investors to boost their outlook for stocks.

"Funny how fast the world can change in a week," said Douglas Porter, economist at BMO Capital Markets.

"Markets continue to behave like the bigger debate is on the strength of the economy's second-half recovery and not whether it will recover, which is a long way from where we were a few short months ago."

Bonds fell sharply amid a shift to equities. The yield on the 10-year Treasury note rose to 3.651 percent from 3.413 percent a week earlier and that on the 30-year bond climbed to 4.529 percent from 4.201 percent. Bond yields and prices move in opposite directions.