NEW YORK (CNN/Money) -
A three-week stock advance faces its biggest challenge yet in the week ahead, as 137 S&P 500 companies report earnings and one Fed chief heads to Capitol Hill.
Bets that the second-quarter earnings will top anemic estimates, however modestly, have played a role in the stock market's three week gain. On Friday, the S&P 500 closed at a four-year high, while the Nasdaq composite ended at a new high for the year.
Investors have also been driving up equity prices -- despite record oil prices -- on bets that the economy is currently hovering in that ideal middle ground, in which growth is strong, but not so strong as to be inflationary.
Next week could go a long way toward confirming some of those bets, or casting concerns on them.
"Right now, we have this positive confluence of earnings and economic news that has been propelling the market," said Jack Ablin, chief investment officer at Harris Trust.
"I think there's enough support, both fundamentally and sentiment wise, to keep the momentum going in the next week," he added, "provided there's nothing interest-rate related that upsets the market."
Specifically, Federal Reserve Chairman Alan Greenspan is set to speak to Congress Wednesday and Thursday, to discuss the health of the economy. Additionally, Friday brings the release of the minutes from last month's Fed meeting.
Investors will be scouring both for clues about the pace of interest rates in the months ahead.
"The Fed has made it pretty clear that they are going to keep raising rates at a measured pace," said Maria Fiorini Ramirez, president of money manager Maria Fiorini Ramirez, Inc. "I don't think there will be anything in Greenspan's testimony or the minutes to suggest otherwise."
Other economic news in the week is light. And that's a good thing, because investors will also have to contend with the first big onslaught of earnings, including reports from 17 Dow components.
(For a look at next week's biggest earnings, see the chart.)
Earnings start to pour
On one hand, the just-completed June quarter is expected to show the smallest year-over-year growth in three years.
But on the other hand, many of the early earnings announcements have been encouraging, and there haven't been many negative pre-announcements, or "earnings warnings" lately.
Earnings tracking firm Thomson Financial currently forecasts that earnings in the second-quarter rose 8.1 percent versus a year ago. That's a "blended" figure, combining already reported results and forecast for the bulk of earnings that haven't been reported yet.
The number marks an improvement from the end of June, when growth of just 7.8 percent was expected, but is still slower than in the first quarter, when growth exceeded 13 percent.
The deceleration in earnings partly relates to the tougher comparisons from a year ago, when growth jumped more than 30 percent. However, corporations are also seeing slower growth amid the impact of higher oil prices and other challenges to the economy.
Unsurprisingly, the group expected to show the biggest growth in earnings in the second-quarter is energy.
"Many of the energy sector earnings have been revised up recently, and that includes forecasts for the second quarter and for the full year," said John Butters, a senior research analyst at Thomson Financial.
The energy sector is expected to see the biggest earnings growth in the second quarter, just as it did in the first. Current forecasts call for year-over-year growth of 35 percent.
On the other end of the spectrum is consumer discretionary, the sector that includes the troubled automakers and auto parts makers. That sector is expected to show a decline of 3 percent in the quarter.
The auto sector's two big leaders -- GM and Ford -- both report results next week.
Consumer discretionary consists of 80 S&P 500 companies. If you strip out the six that are automakers or auto parts makers, the whole group's earnings growth forecast goes from a decline of 3 percent to a gain of 14 percent, Butters said.
Key economic news on tap
- June reads on housing are due Tuesday. Housing starts are expected to have risen to a 2.075 million unit annual rate, according to economists surveyed by Briefing.com, from a 2.009 million unit rate in May; Building permits are expected to have risen to a 2.1 million unit rate in June from an annualized rate of 2.062 million units in May.
- On Wednesday and Thursday, Alan Greenspan gives his semi-annual testimony before Congress, speaking on the health of the economy. The Federal Reserve Chairman speaks on Wednesday to the House of Representatives' Financial Services Committee and on Thursday to the Senate Banking Committee.
- Also on Thursday, the Federal Reserve releases the minutes from the most recent Fed policy meeting in June.
- The June read on leading economic indicators is due Thursday. LEI is expected to have risen 0.5 percent after falling 0.5 percent in May.
- Also on Thursday, the Philadelphia Fed index, a read on manufacturing in the northeast region, is expected to have risen to 9.0 from a read of -2.2 in May. Any read over zero signifies expansion in the sector.