THIS week, US stocks could test record highs if Alcoa, JP Morgan and others can prove there's such a thing as life after quantitative easing for the US economy.
For much of the spring and summer, the Federal Reserve's perception of data and earnings has been more important than the reality. That's why strong consumer spending reports have sometimes prompted selloffs and weak jobs data sometimes inspired rallies. Now that a "tapering" of bond purchases beginning in September is baked into share prices, the market has become more responsive to the quality of the data itself.
That's why Friday's report that the US jobs market was growing steadily caused unequivocal celebration among the bulls.
"All eyes have been on the Fed in recent weeks, but second quarter earnings season is just around the corner and we think it will be more critical than normal," said analysts at brokerage Morgan Stanley, in a research note. "Why? Because unlike earlier this year, we now think 'good is good and bad is bad', meaning the fundamentals will be in focus."
Naturally, traders will go through the minutes from the last Fed meeting with a fine-toothed comb when they are released on Wednesday, but - for once - the Fed may not be the main event.
"We expect earnings releases to, on net, again exceed consensus expectations," the Morgan Stanley analysts said.
The first positive surprise could come from Alcoa today. The processor of aluminium, still one of the most widely used components of industrial goods, will give market participants a sense of global demand when it discloses quarterly earnings. Shares of Alcoa have advanced in recent sessions, suggesting that traders are betting on a brighter outlook and a lessening of the recent aluminium glut.
Car makers, who are major aluminium users, last week reported June as the strongest month for sales since the onset of the Great Recession. Americans are shopping for cars and houses again, even as expectations of a pullback from the central bank drive up borrowing rates.
Indeed, consumer stocks are likely to be among the strongest in the stock market for the balance of the year, said analysts at brokerage Goldman Sachs in a research note. These companies - particularly those that sell goods to wealthy consumers - should thrive in an environment where the jobs market is expanding.
As if conspiring to fill the void left by their US equivalent, the European Central Bank and the Bank of England both made extraordinary announcements last week, committing to prolonged efforts to lower interest rates. That saved the Portugese stock and bond markets from annihilation after high-ranking officials quit the government there in protest at budget reforms.
"Politics in Portugal may remain in focus, following the decision of the leader of the junior coalition partner to resign," said analysts at brokerage Credit Suisse, in a research note. "However . . . major political risks appear to have passed, as members of (the junior party) have stated that they do not wish to leave the coalition."
Traders will also listen carefully to outlook from JP Morgan and Wells Fargo this Friday. Banks are well positioned to judge whether Fed Chairman Ben Bernanke was right in thinking that the economy was strong enough to stand without the prop of central-bank support.
"From the banks, we want to hear what they have to say about lending, and whether or not they see a tickup in demand for loans," said Quincy Krosby, investment strategist at Prudential Financial.
If JP Morgan executives say the demand for home loans can continue to increase despite the recent rise in mortgage rates, the theory that the housing market recovery was purely a function of the Fed's support will be debunked. Home building stocks sold off last week on fears that rising interest rates would squelch the housing recovery. Analysts at Goldman Sachs expect the home builders to come back as the recovery proves resilient.
Analysts at Piper Jaffray expect the broad Standard & Poor's 500 to rise by more than 10 per cent to 1,700 by the end of this year, as some of the trillions of dollars in the US Treasury market are transferred to the stock market. The recent spike in Treasury yields is not only a response to the Fed's but a sign that the "the Great Equity Rotation is unfolding", said the Piper Jaffray analysts, in a note to clients.
Investors are also selling out of their other preferred safe haven during the Great Recession and the euro crisis: gold. prices of the precious metal had their biggest fall on record during the second quarter and the selling has continued.
Unlike the drop in gold prices, the decrease in Treasury prices has repercussions for the economy because it drives up borrowing rates. But most analysts agree with the Fed that the economy can bear the extra pressure.
"The changes in financial markets observed so far are probably not enough to derail a break-out to higher growth next year," said analysts at brokerage Nomura Securities.
For most analysts the question is not whether the Dow Jones Industrial Average will top 16,000, but when.