The bulk of the much-anticipated second-quarter earnings season has passed with Wall Street standing on substantially stronger ground.
So now what?
With stocks up 11 percent since Alcoa (NYSE: AA) kicked off earnings three weeks ago, investors now will be turning their gaze elsewhere to see whether the rally is for real, or if it was just a momentum-driven push that soon will fade.
"When you're in a scenario in the markets when you don't have that many macroeconomic data points and you're beginning to slow down in earnings season, the market tends to obsess about different issues," says Quincy Krosby, general market strategist at Prudential Financial. "Investors will very often just pull back until they can absorb more guidance, particularly when a market is in an overbought scenario."
The market's movements, then, will depend largely on five factors that loom ahead:
1. The Economy
Economic data points—such as unemployment, housing starts, gross domestic product and other statistics—have taken a back seat in investors' minds as companies have reported quarterly earnings.
That's likely to change as Wall Street looks for concrete signs that a recovery is at hand.
"We always say that markets climb a wall of worry, and with that said on every front there's something to be worried about," Krosby says. "The tug-of-war has existed from the very beginning that the recovery was going to be muted against those who say you're going to be surprised that this is going to be a stronger recovery."
GDP numbers due out at the end of this week will help provide a signpost of whether the economy will go positive by year's end.
At the same time, unemployment, considered by many to the biggest fly in the ointment of recovery, may be discounted as a sign of recovery. Talk of a "jobless recovery" has only accelerated in recent weeks.
"The only thing that you're hearing the bears scream about is that without jobs there can't be a real recovery," says Jordan Kimmel, market strategist at National Securities in New York. "Each recovery for the last several decades, the jobs have been more and more of a lagging indicator."
Yet stocks fell Tuesday, precisely on worries that the economy was still sluggish and consumers were not regaining confidence.
2. The Energy Trade
Since the rally began off the March lows, movements in stocks and oil have been closely correlated.
One of the main reasons is that investors have been watching for signs of consumer demand growth. Current demand for oil is relatively anemic, but investors are looking at other signs to gauge the prospects for demand returning in the future.
"In the past few years, there was a $20 to $25 per barrel 'risk premium' added to oil prices. That premium has been replaced by a 'hope premium' as markets believe an improving economy will spur significant demand increase," Marcia Donadio, an analyst at Ernst & Young, said in a study released Monday. "Major players in the energy industry are preparing for the upturn."
Ernst & Young said hopes for a recovery are playing out across the energy spectrum, not just in gas and oil prices.
"While recovery will be slow and gradual, there is a great deal more optimism in the markets going into the third quarter, and that is reflected in oil and gas industry activity," Donadio said.
3. More Earnings: Energy, Regional Banks
While many of the big financial companies and major Dow components have already reported earnings, there still are a handful out there.
Energy companies will be looked at particularly for their outlooks, while regional banks will be watched closely for deterioration in their commercial lending portfolios. Most report results this week or next.
In a broad review of third-quarter banking earnings, Keefe, Bruyette and Woods found "weak profitability" for small-cap banks to be among the biggest trends, and said commercial credit quality was slipping at an appreciable pace.
"The Goldman Sachses (NYSE: GS) of the world did just fine, and investors have flocked to those situations," David Twibell, president of wealth management at Colorado Capital Bank in Denver, said in a recent interview. "By and large the real banking world out there, the regional banking world, is not doing well."
4. Progress in Healthcare
Investors remain concerned over the drastic revamping of the healthcare industry, as proposed by President Obama and making its way through Congress now.
Fitch ratings last week said it was downgrading more insurers that it covers, based primarily on concerns it has over how the companies will fare in competing with the government for the healthcare dollar.
But some analysts believe that the final bill to come out of Congress will be far less radical than the original plan, and will present opportunities across the healthcare spectrum.
"For investors in healthcare stocks, the longer Washington's logjam continues, the less threatening the final version of legislation is likely to be," John L. Sullivan, an analyst with Leerink Swan, said in a research note.
He added that "a discounted valuation offers healthcare investors an opportunity" and said the pickings will be especially ripe in biotech and managed care.
5. Buying Opportunity?
A general sentiment that the strong earnings run is leading to a natural pullback has some market pros sensing an opportunity.
"When it comes to the psychology part everybody is so afraid of seeing a ghost right now," National Securities' Kimmel says. "They're seeing things that don't exist."
In such a climate, Kimmel says smart investors will be selective. He recommends bulking up on small caps and international companies, which he says are traditional market leaders out of a bear cycle.
Technology as well remains popular among those who think the market could recoil against a pullback sentiment.
Richard Sparks, senior analyst at Schaeffer's Investment Reserach in Cincinnati, recommends mid-cap technology companies such as Juniper (NASDAQ: JNPR) and Synaptics (NASDAQ: SYNA), and counsels against buying into the talk of a natural selloff.
"I'd hesitate to be part of that big crowd that is always going to be worried about a pullback or think we definitely have to correct here," Sparks says. "I don't think it's time to lighten up. Ride the trend as far as it goes."