U.S. stocks keep proving the naysayers wrong, as major averages continue to gain despite expectations for the recent rally's demise. And next week may be no different.

But after a frenzied two-month run, the roadblocks may be too much to overcome.

Fears that bank stress tests will cast an even bigger shadow over the addled financial sector coupled with uncertainty about the April employment figures might just bring the rally to an end.

It will undoubtedly be a busy week with Federal Reserve Chairman Ben Bernanke heading to Capitol Hill to testify on the economy on Tuesday, the all-important April non-farm payrolls data set for release on Friday and authorities worldwide mobilizing against a deadly new flu strain.

Earnings reports should also command attention on Wall Street with Walt Disney (DIS.N: Quote, Profile, Research, Stock Buzz), a market bellwether, among the companies due to post quarterly scorecards.

But analysts said the stock market's direction would mainly hinge on what emerges from the U.S. bank stress test results.

The focus is on the much ballyhooed and delayed release of the details of the stress tests, said David Dietze, president and chief investment strategist at PointView Financial Services in Summit, New Jersey.

What investors are bracing for is to have a great big problem unloaded on them on those banks without a clear path to resolve it, he said, adding that raises questions as to the sustainability of the rally.


The stress tests are a government exercise to help regulators gauge what any additional capital would be needed in the event of a range of economic scenarios.

According to a government source, the results measuring the health of the largest 19 U.S. banks are expected to be made public on Thursday.

There are a lot of risks to the market over the next few weeks that might lead to some sell-off in financial stocks and in the market as a whole, said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

A lot of information has been leaked out already, that everybody is going to pass the tests, but some of the big banks -- especially Citi and Bank of America -- are going to be asked to raise additional capital. Will there be further dilution of the existing shareholders?, he added.

Ever since major U.S. banks, including Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz), signaled in early March that they had had a strong start to 2009, investors have found little reason to shun stocks.

The benchmark S&P 500 .SPX has risen 30 percent since touching a 12-year low on March 9, while the KBW Bank index .BKX has risen 64 percent since that psychologically-significant low.

For the latest week, the Dow Jones industrial average jumped 1.7 percent and the S&P 500 gained 1.3 percent. The Nasdaq climbed 1.5 percent -- capping its eighth straight weekly advance, its longest weekly winning streak since December 1999.

Another recent boost for stocks has been a spate of surprisingly less-dire reports on the economy, suggesting that the recession that began in December 2007 may be abating.


But for a market now coming up against some significant resistance at levels last seen in January, a search for catalysts to sustain the recent rally may make next week a critical juncture.

Some analysts say a sideways movement would be healthy so the market can consolidate the recent gains. And those steeped in the history of Wall Street are mindful of the old saw: Sell in May and go away.

We've had a monster rally, there's been a lot of short covering, said John Schloegel, vice president of investment strategies at Capital Cities Asset Management in Austin, Texas.

If you're a prudent investor who's been able to participate in such a gigantic rally it would make sense to pare back especially if you have a heavy weighting in equities, he said.

Overall, some skepticism about the likelihood of a further run-up has begun to emerge.

According to Citigroup's Chief U.S. equity strategist Tobias Levkovich, stock mutual funds garnered six straight weeks of inflows starting the week of March 18, totaling $15.9 billion, with about 85 percent of that amount designated for U.S. funds.

However, bond funds raked in $39.14 billion during the same period, underscoring a clear tone of skepticism among individual investors.

I would think we're topping. The market looks very top-heavy, said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago. I think a correction would even be healthy at this point.

Friday's payrolls report is expected to show the economy shed more than 600,000 jobs in April and the unemployment rate jumped to 8.9 percent from March's 8.5 percent.

Other key data will be Tuesday's reading on the vast service sector from the Institute for Supply Management, the government's productivity and costs report for the first quarter on Thursday, and the ADP National Employment report on Wednesday.

Bernanke will appear before the U.S. Congress' Joint Economic Committee on Tuesday at 10 a.m. EDT (1400 GMT), while on Thursday he is scheduled to speak on banking supervision.

On the earnings front through May 1, about 326 of S&P 500 companies have already reported first-quarter results, with 66 percent beating estimates, 9 percent matching and 25 percent missing.

Besides Disney, other likely earnings highlights in the upcoming week include Sprint (S.N: Quote, Profile, Research, Stock Buzz), Tyson Foods (TSN.N: Quote, Profile, Research, Stock Buzz), Kraft Foods (KFT.N: Quote, Profile, Research, Stock Buzz), Cisco Systems (CSCO.O: Quote, Profile, Research, Stock Buzz), Pulte Homes (PHM.N: Quote, Profile, Research, Stock Buzz), D.R. Horton (DHI.N: Quote, Profile, Research, Stock Buzz) and Allstate Corp (ALL.N: Quote, Profile, Research, Stock Buzz). For the full earnings diary, see

Major U.S. retailers are also scheduled post monthly sales on Thursday.

(Wall St Week Ahead runs weekly. Questions or comments on this column can be e-mailed to: ellis.mnyandu@thomsonreuters.com)