NEW YORK (CNN/Money) - Wall Street seems fixated on the idea that once Iraq is out of the way, all that ails the U.S. economy will fall by the wayside. Let's hope that's true, because if it isn't the market could be in for one heck of a drop.

Stocks have surged mightily in the 3-1/2 weeks since they hit their lows for the year, with the Dow Jones industrial average skipping more than 10 percent higher.

It's been all about the war, of course. First, there was that odd relief that came once everyone was sure war was going to happen -- one less uncertainty to deal with. Then there was the general sense, peppered with a few periods of doubt, that the war has been going swimmingly well.

But during that same period the news away from the war has been just dismal. Economic report after economic report has come in below expectations. It now appears that after starting the year on good footing, the economy may actually have contracted in February and March. If the economy doesn't stop its swoon within the next few months, instead of wondering if there will be a recession, we'll be wondering how long the recession is going to last.

Economy and Markets 108,000 jobs lost Friday's market wrap Retailers seek excuses

"The economy hit a brick wall in February and March," said Deutsche Bank chief U.S. economist Cary Leahey. "The risk of a recession is higher now than I thought it would have been six months ago. It's higher now than I thought it would have been six weeks ago."

News on the corporate front hasn't been good, either, with companies warning left and right that their results won't meet expectations in the upcoming earnings season. And there are bound to be more warnings in the coming week, as companies run through their numbers for the first quarter. (Click here for a line-up of the week's key events.)

Typically the ratio of companies saying they'll miss estimates to those that say they'll meet or exceed expectations is 2.3 to one, notes Ehrenkrantz King Nussbaum chief investment officer Joe Kalinowski.

This quarter, it's running at 2.9 to 1 -- the highest since the third quarter of 2001, when the Sept. 11 terror attacks damaged businesses badly. This suggests that when earnings season kicks off in another week or so, it will be rife with companies telling investors not to expect much from the just-started second quarter.

But given recent market action, Kalinowski thinks investors may be in a forgiving mood. "It's really easy for a company to come up with an excuse," he said. "The culprits are going to be war with Iraq, the CNN effect, weather and, now, SARS."

The implication will be that, once all the dust settles, we'll be back on the road to prosperity. Judging from market action, that's an implication that investors are eager to buy.

"This has been the strongest rally we've had since the bear market started," said Lowry Reports technical analyst Richard Dickson. "There continues to be good demand for stocks. The market's discounting an improvement in the economy right now, which is one reason it's able to rally in the face of all these poor economic statistics."

To gauge a rally's strength Dickson compares the volume of shares that finish higher on a given day to the volume of shares that end lower. When that ratio goes through 90 percent, as it did on March 17, when the Dow climbed 282 points, it's a sign that selling has been washed out of the market. It makes Dickson think the Dow could easily clear 9,000 again -- another 750 points up.

Kalinowski, too, thinks that stocks could continue to run higher, particularly on the resolution of war. But he worries there will come a point where, from some higher perch, investors rub their eyes and don't like what they see.

"There will come a day again where people are going to look at earnings numbers and attempt to value companies fundamentally," he said. "When that time comes, I don't know if the numbers are going to stack up."

• February wholesale inventories, due out Tuesday morning, are expected to come in flat, against a 0.1 percent decline in January, according to economists surveyed by Briefing.com. Companies, worrying over the future, have been keeping inventories trim.
• Yahoo! (YHOO: Research, Estimates), whose share have been flying lately, reports first-quarter results Wednesday. Analysts polled by Multex forecast earnings of 6 cents a share, versus last year's 2 cents.
• The February trade balance, set to come out Thursday morning, is forecast to show a deficit of $42.4 billion for February versus January's $41.1 billion. The bigger the deficit, the more it cuts into gross domestic product.
• Friday morning the Labor Department will release the key read on inflation at the wholesale level, the producer price index, for March. Economists expect that it rose 0.4 percent for the month, compared to 1 percent in February. That gain is all about rising energy prices -- the core PPI, which excludes food and energy, is expected to come in flat.
• After a big downdraft in February, economists think retail sales stabilized in March. Overall sales are expected to rise by 0.2 percent versus February's 1.6 percent drop. Exclude autos, and they're expected to rise 0.3 percent, when they come out Friday.
• General Electric (GE: Research, Estimates) reports results Friday morning. Some key divisions at the company have been hurt badly over the past year -- like jet engines, where sales have been damaged by trouble in the airline sector. Analysts expect the company earned 32 cents a share in the first quarter versus last year's 35 cents.
• The University of Michigan's first sounding on consumer sentiment index for April is expected to come in at 77.6, even with its final March reading.