The real test for stocks

NEW YORK (CNNMoney.com) -- The stock market's best week in a year has restored some confidence to battered investors, but the real test begins Monday when companies start reporting second quarter profits and losses.

Dow component Alcoa (AA, Fortune 500) kicks things off Monday. Four other Dow names report this week: Intel (INTC, Fortune 500) on Tuesday, JPMorgan Chase (JPM, Fortune 500) on Thursday and General Electric (GE, Fortune 500) and Bank of America (BAC, Fortune 500) on Friday. Also on tap: Google (GOOG, Fortune 500) on Thursday and Citigroup (C, Fortune 500) on Friday.

A total of 21 S&P 500 companies will announce results this week, with most of the rest spread out over the next three weeks.

"Second-quarter numbers will come in big, but there will be less upbeat surprises and less of a market reaction," said Dan Genter, president of RNC Genter Capital Management.

Investors will have a close eye on what the companies forecast about the rest of the year. "We'll probably see companies guiding lower as they factor in slower growth," Genter said.

Profits: Second-quarter earnings are expected to be up 27%, according to trackers at Thomson Reuters. But those results don't factor in the sea change in sentiment that swept markets from April through June as bets on a recovery turned to worries about the impact of the European debt crisis and fears of a double-dip recession in the United States.

"We've done a lot to destroy investor confidence over the last two months," said Mark Travis, CEO at Intrepid Capital Funds. "I don't think we'll see a double-dip for the economy, but growth is clearly going to be slow."

Slower growth is something economists have not really factored in to their forecasts.

Estimates for this quarter, the rest of the year and 2011 are only modestly lower than they were in early May. Yet since that time, the market has fallen into a correction, with the major gauges all off more than 15%.

"Analysts are expecting sequential growth every quarter through the end of 2011, even with the uncertainty about Europe and the U.S. economy," said John Butters, senior research analyst at Thomson Reuters.

These expectations have made the market appear to be a good value. The S&P 500's price-to-earnings ratio for the four leading quarters is down to 12.1 versus the five-year average of 14.2. But that number could be misleading.

"Either the stock market has overdone it, and there's room to rally or the analysts have been too optimistic and need to guide lower," Butters said.

Last week, the Dow Jones industrial average (INDU), the S&P 500 (SPX) index and the Nasdaq (COMP) composite all gained at least 5% on bets that second-quarter profits will deliver.

It was the best week for the market in nearly a year, but it coincided with some of the lowest trading volume in weeks and followed a long losing streak. Whether the uptrend continues will depend on the earnings, but also on the economic news.

The week ahead will bring reports on retail sales, jobs, consumer sentiment and inflation.

Tuesday: The trade balance, due in the morning from the Commerce Department, is expected to have narrowed to $39.5 billion in May from $40.3 billion in April, according to a consensus of economists surveyed by Briefing.com.

The June Treasury budget is also due in the afternoon, but is not usually a big market mover.

Wednesday: The Commerce Department releases the retail sales report before trading starts. Sales are expected to have fallen 0.2% in June after having fallen 1.2% in May. Sales excluding volatile autos are expected to have held steady after falling 0.8% in April.

Reports are also due in the morning on import and export prices, business inventories and weekly crude oil inventories, but those are typically not market movers.

In the afternoon, the minutes from the last Federal Reserve policy meeting are due for release, along with Fed forecasts on the economy.

Thursday: The Department of Labor releases the weekly jobless claims report in the morning. The number of Americans filing new claims for unemployment last week is expected to have fallen to 449,000 from 454,000 in the previous week.

The Producer Price Index, a measure of wholesale inflation, is due out from the Commerce Department in the morning. The index is expected to have fallen 0.1% in June after falling 0.3% in May, suggesting inflation is not an issue at the present time. The so-called core PPI, which strips out volatile food and energy prices, is expected to have risen 0.1% after rising 0.2% in the previous month.

Reports are also due on industrial production and capacity utilization and manufacturing in the northeast.

Friday: The Commerce Department releases the Consumer Price Index, a measure of consumer inflation, in the morning. CPI is expected to have held steady in June after falling 0.2% last month. Core CPI is expected to have risen 0.1% after rising 0.1% in the previous month.

The revised reading on July consumer sentiment from the University of Michigan is due in the morning. Sentiment is expected to have fallen to 74.5 from the previous reading of 76 from early July.