Beyond Earnings: Five Things Investors Will Be Watching

The bulk of the much-anticipated second-quarter earnings season has passed with Wall Street standing on substantially stronger ground.

Richard Drew / AP

So now what?

With stocks up 11 percent since Alcoa

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[AA  Loading...      ()   ] kicked off earnings three weeks ago, investors now will be turning their gaze elsewhere to see whether the rally is for real, or if it was just a momentum-driven push that soon will fade.

"When you're in a scenario in the markets when you don't have that many macroeconomic data points and you're beginning to slow down in earnings season, the market tends to obsess about different issues," says Quincy Krosby, general market strategist at Prudential Financial. "Investors will very often just pull back until they can absorb more guidance, particularly when a market is in an overbought scenario."

Jeff Cox
Senior Writer
CNBC.com

The market's movements, then, will depend largely on five factors that loom ahead:

1. The Economy

Economic data points—such as unemployment, housing starts, gross domestic product and other statistics—have taken a back seat in investors' minds as companies have reported quarterly earnings.

That's likely to change as Wall Street looks for concrete signs that a recovery is at hand.

"We always say that markets climb a wall of worry, and with that said on every front there's something to be worried about," Krosby says. "The tug-of-war has existed from the very beginning that the recovery was going to be muted against those who say you're going to be surprised that this is going to be a stronger recovery."

GDP numbers due out at the end of this week will help provide a signpost of whether the economy will go positive by year's end.

At the same time, unemployment, considered by many to the biggest fly in the ointment of recovery, may be discounted as a sign of recovery. Talk of a "jobless recovery" has only accelerated in recent weeks.

"The only thing that you're hearing the bears scream about is that without jobs there can't be a real recovery," says Jordan Kimmel, market strategist at National Securities in New York. "Each recovery for the last several decades, the jobs have been more and more of a lagging indicator."

Yet stocks fell Tuesday, precisely on worries that the economy was still sluggish and consumers were not regaining confidence.

2. The Energy Trade

Since the rally began off the March lows, movements in stocks and oil have been closely correlated.

One of the main reasons is that investors have been watching for signs of consumer demand growth. Current demand for oil is relatively anemic, but investors are looking at other signs to gauge the prospects for demand returning in the future.

• Video: How to Play Big Oil Earnings

"In the past few years, there was a $20 to $25 per barrel 'risk premium' added to oil prices. That premium has been replaced by a 'hope premium' as markets believe an improving economy will spur significant demand increase," Marcia Donadio, an analyst at Ernst & Young, said in a study released Monday. "Major players in the energy industry are preparing for the upturn."

Ernst & Young said hopes for a recovery are playing out across the energy spectrum, not just in gas and oil prices.

"While recovery will be slow and gradual, there is a great deal more optimism in the markets going into the third quarter, and that is reflected in oil and gas industry activity," Donadio said.