Now It's Earnings That Could Stall the Stock-Market Rally

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Signs the economy has entered a soft patch could slow Wall Street's bull but it may be earnings season that ultimately makes stocks stumble.

First-quarter earnings reports will start to trickle out in the week ahead with just a few blue chip names reporting — Alcoa on Monday, and JP Morgan and Wells Fargo on Friday. There are also some important economic data, particularly retail sales on Friday, which could help show whether tax increases are pinching consumers and give some context to the weaker March economic reports, including Friday's dismal jobs number.

The addition of just 88,000 nonfarm payrolls in March was a game-changer for the markets, and chatter that the Federal Reserve may be moving to end quantitative easing sooner-than-expected abruptly faded.

(Read More: US Job Creation Plunges, but Rate Drops to 7.6%)

Traders will find more fuel for speculation in the coming week when the Federal Reserve releases minutes from its last meeting. There are also more than a half dozen appearances by Fed officials in the coming week, including Fed Chairman Ben Bernanke.

Bernanke will be at two forums, speaking Monday evening on the topic of maintaining financial stability at the Atlanta Fed's conference. His second address is Friday at the Fed's Community Development Research Conference, and his topic is creating resilient communities. Besides the Atlanta Fed conference, the Boston Fed holds an economic conference starting Friday.

"I think the reason the stock market is not down more is it certainly underscores the Fed keeping its foot on the accelerator and for those who had been comforted by this monetary backstop of Fed easing, it doesn't look like it's going anywhere soon," said Leo Grohowski, CIO of BNY Mellon Wealth Management.

San Francisco Fed President John Williams in the past week stirred concerns when he said the Fed could start tapering asset purchases this summer, several months sooner than anticipated by markets. But the string of weaker-than-expected data in the past week, capped by the sluggish jobs growth, changed the market tone dramatically.

(Read More: It's the 'End of the End of QE Talk')

Like many strategists, Grohowski does see an overdue pullback for stocks, but he says it should be a shallow three- to five-percent move because of the large amount of cash waiting to come into the market, and the fact that the Fed remains supportive. He sees the S&P 500 at 1650 by year end.

Frances Hudson, global strategist for Standard Life Investments in Edinburgh, also sees a shallow pullback coming in U.S. equities."To me it's more of a problem if they keep appreciating at the rate that they have been because I don't think the macroeconomic or political backdrop warrant it. We'll get some signs from retail sales next week, and the consumer sentiment from University of Michigan. Company earnings in the previous quarter were good in the sense that they were soundly beating expectations, but as for earnings growth, they weren't so positive," she said. "We could also start to see the (impact of) tax increases, which hadn't hurt consumer behavior initially."

Hudson said the U.S. is her favorite equities market. "I would also expect to see a delayed reaction to some of the tax hikes. It's not necessarily the end of the world. It's a bump in the road…I would have thought that there was enough money waiting on the sidelines that they might see this as a buying opportunity so if the markets come off, there are still positives in the underlying data," she said. "The housing market seems to be doing okay…We think it's a slow road to recovery."

The earnings outlook for the current quarter is fairly weak, with growth expected to increase by just 1.6 percent, compared to 6.2 percent last quarter, according to Thomson Reuters. The quarter also has seen an unusually high number of negative warnings, with 107 negative revisions for companies in the S&P 500. Compared to the positive revisions, it is the worst pace in 12 years, according to Thomson Reuters.

"We'll have something else to worry about with earnings. I think the quarter is going to be a low single-digit earnings type of quarter," Grohowski said. "And my read is most investors aren't expecting more than that, which is kind of good news. The key will be company guidance and what they are saying about the rest of the year."

Grohowski said prior to this week, his concerns had been that interest rates would rise and that earnings would be a problem, with interest rates being of bigger concern.

But after a batch of soft economic data and a bond-market rally, which drove the 10-year yield below 1.7 percent, Grohowski said his concern has now shifted to earnings.

Stocks initially nosedived after the weak jobs report Friday, but by the end of the day, the Dow was down just 40 points at 14,565, giving it a loss of less than 0.1 percent for the week. The S&P 500 fell 1.0 percent for the week, to 1553. Other indexes lost more, like the Russell 2000, down 3 percent, and the Dow Transports, down 3.5 percent. At the same time, investors rushed into bonds, creating a short squeeze that sent the 10-year yield as low as 1.67 percent Friday, its lowest level since December.

As the second quarter got underway this past week, it became clear from ISM manufacturing and services-sector data that growth was a bit slower than the first quarter. The jobs report reinforced that so any clue to the state of the slump will be important.

Economists expect the second and third quarters to be the slowest period of the year after a stronger first quarter, which could see growth of more than 3 percent. They also see no near- term change in the Fed's monthly purchases of $85 billion in Treasurys and mortgage securities, and some expect Fed comments to be more dovish following the disappointing jobs report.

(Read More: Forever Fed: Jobs Blues Sets Up Eternal Easing)

"This is an economy where you want the Fed to be acommodative," said Michael Darda, chief economist and market strategist at MKM Partners. Darda said the jobs number should be looked at against the 12 month average, and it would show a consistent pattern of growth. February's surprisingly large 236,000 jobs was actually revised even higher to 268,000. He also expects the full year to be better than the last three, after this year's "Spring swoon."

"I think we'll see weaker numbers in the spring/summer,"said Mark Zandi, chief economist at Moody's Economy.com. He said the impact of the sequester, or automatic federal spending cuts, is not yet showing up in the data but it should soon. Zandi expects two- percent growth in both the second and third quarters, and he expects job growth to amount to about 150,000 a month for the next couple of months.

Zandi said the key data he is watching will be retail sales,which he expects will be flat when reported Friday.

Markets will also stay on high alert for news from North Korea, which has sent ripples through markets in the past week.

(Read More: North Korea to Foreign Embassies: 'Consider Evacuating')

Week Ahead

Monday

Earnings: Alcoa

8:30 am Cleveland Fed President Sandra Pianalto on economy

7:15 pm Fed Chairman Ben Bernanke at Atlanta Fed on financial stability

Tuesday

Earnings: PriceSmart

7:30 am NFIB small business survey

9:30 am Richmond Fed President Jeffrey Lacker

10:00 am Job opening data

10:00 am Wholesale inventories

1:00 pm Atlanta Fed President Dennis Lockhart

1:00 pm $32 billion 3-year note auction

Wednesday

Earnings: CarMax, Constellation Brands, Fastenal, Progressive, Bed Bath and Beyond, Ruby Tuesday, Chevron (interim results)

7:00 am Mortgage applications

8:20 am Atlanta Fed's Lockhart

8:30 am Minneapolis Fed President Narayana Kocherlakota

1:00 pm $21 billion 10-year note auction

2:00 pm FOMC minutes

5:00 pm Dallas Fed President Richard Fisher on economy

Thursday

Monthly chain store sales

Earnings: Commerce Bancshares, Pier 1 Imports, Rite Aid, JB Hunt Transport

6:00 am Philadelphia Fed President Charles Plosser

8:30 am Initial claims

8:30 am Import prices

8:30 am St. Louis Fed President James Bullard

1:00 pm $13 billion 30-year bond auction

Friday

Earnings: JPMorgan Chase, Wells Fargo, Infosys, Shaw Communications

8:30 am PPI

8:30 am Retail sales

8:45 am Boston Fed President Eric Rosengren at conference

9:55 am Consumer sentiment

10:00 am Business inventories

12:30 pm Fed Chairman Bernanke at Fed's Community Development Conference