Wall Street's reality check

A second-quarter rally has given way to what could be a rocky third quarter as investors contend with quarterly results, economic reports.

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By Alexandra Twin, CNNMoney.com senior writer

The S&P 500 lost 11.7% in the first quarter and gained it back and then some in the second quarter.
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NEW YORK (CNNMoney.com) -- A dismal jobs report has set the stage for what could be a month of reality checks on Wall Street as the spring stock rally hits a wall.

Investors returning from a three-day holiday weekend face a smattering of economic report cards on the health of the U.S. consumer. Meanwhile, Dow aluminum maker Alcoa (AA, Fortune 500) has the dubious honor of unofficially kicking off what is expected to be another tough quarter for corporate earnings.

Stocks, as measured by the S&P 500, rallied 40% between the March 9 lows and the June 11 highs. But in the weeks since, stocks have drifted lower, with the S&P 500 sliding 5% as bets that the economy is close to stabilizing turned to worries that the market jumped the gun.

"We are moving out of the paralysis phase that followed the collapse of Lehman Brothers and back into a recession phase," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. "I think people have confused that transition with the beginning of a recovery."

Friday's much worse than expected June jobs report sent investors heading for the exits in a thinly traded session ahead of the Independence Day holiday weekend.

The next few weeks on Wall Street are unlikely to give investors any reason to jump back into stocks. But enough optimism remains in place -- and enough government money will flood the system -- that a bigger selloff can probably be avoided, said Gary Webb, CEO at Webb Financial Group

"The labor market is going to continue to suffer until confidence picks up, consumer spending picks up and businesses can start hiring again," Webb said. "But I don't think that means stocks are going to see a major pullback."

He said that stocks are likely to drift throughout the third quarter and start to turn up in the fourth quarter as the economy finally starts to show the signs of stabilizing stock investors have been hoping for.

"I think we'll see stock gains through the end of the year, but at a snail's pace," he said.

Quarterly results: Alcoa is on tap this week, but the bulk of profit reports aren't due until the end of the month.

Profits for S&P 500 companies are expected to have fallen 21% versus the same quarter a year ago, according to the latest estimates from earnings tracker Thomson Reuters.

Unlike in the first quarter, when investors were just glad to see companies meet forecasts, corporations are now going to have to beat expectations and give positive forecasts for investors to respond positively.

"Second-quarter results are relatively irrelevant," said Burt White, chief investment officer at LPL Financial. "Investors want companies to say they see conditions getting less bad in the second half of this year and early next year."

On the docket

Monday: The Institute for Supply Management releases its index on the services sector of the economy, shortly after the start of trading. The index is expected to have risen to 46 in June from 44 in May.

Tuesday: No market-moving economic news or events are on tap for Tuesday.

Wednesday: May consumer credit is expected to have fallen $7.5 billion in the month after falling $15.7 billion in the previous month. The Federal Reserve report is due in the afternoon.

The weekly crude oil inventories report from the Energy Information Administration is due in the morning.

Also, the G8 summit begins Wednesday in Italy, running through Friday.

After the close, Dow component Alcoa unofficially begins the second-quarter reporting period. The aluminum maker is expected to report a loss of 34 cents per share versus a profit of 66 cents a year ago.

Thursday: May wholesale inventories are expected to have fallen 1% after falling 1.4% in the previous month. The Commerce Department report is expected to show that inventories plunged for a ninth straight month.

The nation's chain stores will release sales figures for June throughout the morning.

The weekly jobless claims report from the Labor Department is also due in the morning.

In Washington, the House Financial Services committee holds a morning hearing on reinvesting bank bailout money. In the afternoon, a subcommittee debates expanding the Federal Reserve's role as a risk regulator.

Friday: The May trade balance is expected to have widened to $30 billion from $29.2 billion on weaker exports amid the global economic slowdown. The Commerce Department report is due before the start of trading.

Also due: June import and export prices from the Labor Department.

The University of Michigan releases its initial reading on consumer sentiment shortly after the start of trade. The index is expected to have risen to 71.0 from 70.8 in June. To top of page

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