Investors carried Wall Street to a remarkable second-quarter performance even though stocks' big spring rally stalled weeks ago.
The major indexes all managed to end the quarter with double-digit percentage gains.
Now, whether the market regains its momentum in the July-September period or hunkers down again will depend on what companies have to say in the next few weeks - not just about their own prospects, but the economy's as well.
The Dow Jones industrial average rose 11 percent during the quarter. The Standard & Poor's 500 index surged 15.2 percent. Both indexes logged their first quarterly gains since the third quarter of 2007.
The Dow also had its best quarter since 2003 and the S&P 500 its best since 1998. The S&P 500 index and the Nasdaq composite index are finishing the first half of 2009 in the black.
The Nasdaq, heavily populated by tech stocks, rose 20 percent for its first winning quarter in a year and had its best quarter since 2003. The quarter turned out better than most traders might have expected when the major indexes sank to 12-year lows in early March on growing despair about the recession. But the market's advance wasn't as impressive as it was in mid-June, when the major indexes hit multi-month highs.
Since then, investors' uncertainty about the strength of an economic recovery has brought the Dow down 4 percent, the S&P 500 down 2.8 percent and the Nasdaq, 1.5 percent.
On Tuesday, the last day of the quarter, the Dow fell 82.38, or 1 percent, to 8,447.00; the S&P 500 fell 7.90, or 0.9 percent, to 919.33, and the Nasdaq slid 9.02, or 0.5 percent, to 1,835.04.
Investors have gone through a big psychological shift over the past six months. After sending the Dow plunging to a 12-year low in early March amid fears of another Great Depression, they drove it up a staggering 34 percent from mid-March to mid-June as the global economy and corporate world showed signs of stabilizing. It was the shortest time frame for a market recovery of that size since the 1930s. And while no one knows yet if the United States was coming out of a recession during the just-ended quarter, the market as measured by the S&P 500 acted as if it was.
The S&P 500 was up 13.6 percent in the first quarter of 1991 as it came out of a recession, and 16.8 percent in the fourth quarter of 1982.
"That massive fear of a complete failure in the financial system? That's been taken off the table," said Brett D'Arcy, chief investment officer of CBIZ Wealth Management.
"The doomsday predictions? Those have been largely pushed aside."
But investors are well aware that American businesses may still be facing hard times. That's making the market uneasy about what corporate executives have to say in the coming weeks.
First, there's the issue of how they're making money. Companies largely cost-cut their way into profitability in the first quarter of 2009. That technique might not fly with investors looking for signs of real growth as they enter the second half of the year - when the economic recovery is supposed to arrive.
"I don't think the markets are going to give companies a free pass anymore," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.
Second, investors want to hear executives' take on the economy. Outlooks are important in any business environment because companies offer more detailed views into economic indicators such as orders, inventories and consumer trends. Even if the forecasts are disappointing, analysts believe stocks are on a more solid footing than they were earlier this year.
The market is no longer being driven by panic
Still, stocks have paused and wobbled because the economic data that fired up their rally in early March haven't improved significantly the past few weeks. Companies aren't laying off workers as much as they were in early 2009, but the unemployment rate keeps heading toward 10 percent. Reports have shown that consumers are saving more than they're spending, and that home prices still haven't recovered. Stocks fell Tuesday after the Conference Board's consumer confidence index fell unexpectedly in June.
The Standard & Poor's/Case-Shiller index showed another decline in home prices, albeit it the smallest since June 2008. For Wall Street's rally to continue, the market needs to experience that economic recovery, said Nicholas Colas, chief market strategist at ConvergEx.
The U.S. government has pumped trillions of dollars into the financial system and the economy. Stimulus packages usually take six to nine months to work their way through the system, so investors will be looking for those dollars showing up in corporate growth and personal spending in the second half.
The most closely watched industry during earnings season will be financial companies, Colas said, as banks have gotten the biggest boosts from the government. Colas predicts impressive second-quarter results from financial institutions, but major disappointments could thwart the market's recovery.
Bob Doll, global chief investment officer for equities at BlackRock Inc., anticipates U.S. stocks will log a double-digit percentage gain in 2009 - an impressive move, though it's important to remember that Wall Street had its worst year since the Depression in 2008.
Experts also expect the S&P 500 index, the broadest measure of the stock market, to finish the year higher.
The S&P 500 is only up 1.8 percent since the beginning of the year, and still down 41 percent from its record high in October 2007, so the second-quarter rally needs to be put in perspective, D'Arcy said