With Wall Street stuck in a range since May, the start of second-quarter earnings season next week could prove to be a decisive factor for determining how much faith investors should have in an economic recovery.
After a rally of as much as 40 percent for the S&P 500 on expectations the economy will begin to turn around by year end, analysts will hone in on companies' projections to see if their hopes are corroborated.
The light menu of economic data will help keep the spotlight on earnings releases, with bellwethers Alcoa and Chevron posting their quarterly scorecards. Of even more importance will be any outlook companies give for what they expect to see for the rest of the year.
A large U.S. Treasury auction could buoy the market if it shows there is good demand for government debt. Concern that the appetite for debt is waning as the government tries to fund its stimulus efforts was soothed by solid demand in last week's record $104 billion auction of Treasury securities.
I think we are range bound and we're going to stay there for a while, said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale, Illinois.
What will probably break it is going to be the earnings season because the expectation is for at least some rebound in earnings, especially from the banking sector.
WHEN 'LESS UGLY' LOOKS GOOD
Investors will be looking for companies to release results that are less bad in the same way that recent economic data has spurred optimism that the worst is over.
Analysts say that companies should be able to beat the relatively low bar that has been set by expectations, which could help the market add some gains.
Earnings for S&P 500 companies are expected to decline by 35.5 percent in the second quarter, according to Thomson Reuters data. While all 10 sectors are anticipated to fall, healthcare should fare the best, slipping just 2 percent.
On the opposite side, the materials and energy sectors are forecast to do the worst, falling 78.9 percent and 64.7 percent, respectively.
On the earnings front, it's going to be ugly reading, but it's just going to be less bad, just like the economic data, said Scott Marcouiller, senior equity market strategist at Wells Fargo Advisors in St. Louis.
WANTED: HEALTHY OUTLOOKS
But the real spotlight will be on what companies foresee for the rest of the year.
Forecasts of profitability and improving consumer demand would increase optimism that the U.S. economy is finding its footing. Analysts said companies will have to signal the economy is actually improving and investors will not be impressed if they're just cutting costs and slashing jobs, as has been the case in recent quarters.
Nolte said the S&P 500 has been stuck between 880 and 950.
After surging from a 12-year closing low on March 9, the S&P 500's rally has stalled over the last couple of months. For June, the benchmark index was little changed.
Nonetheless, the S&P 500 has support at the bottom of that range and any dip toward that level will be a key test, analysts said. Holding above that range will be a positive sign for the market.
Since March, pullbacks have been relatively shallow and short-lived as investors who missed the rally the first time see the dips as buying opportunities.
There's been plenty of reasons to have the legs kicked out from under us, but it hasn't happened, Marcouiller said.
It tells you the money is quick to be there.
On the data front, reports are expected on the service sector in June from the Institute for Supply Management on Monday, as well as the international trade deficit for May and the preliminary July reading on consumer sentiment from Reuters/University of Michigan surveys -- both on Friday.
Weekly initial jobless claims data will get more attention than usual after Thursday's non-farm payrolls fell much more than expected.
If initial claims continue to rise, it will probably begin to cast some doubt about the strength of the recovery, said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
(Editing by Jan Paschal)