Many analysts are facing this week's flood of earnings with a healthy dose of skepticism, knowing that results will once again have to exceed Wall Street's expectations to continue the market's advance.
The earnings parade comes as the Dow Jones Industrial Average and the S&P 500 trade at record highs with the blue-chip index touching 14,000 for the first time. But rally aside, analysts believe there are still issues hanging over the market, which have caused a large share of the volatility since June.
"What's really intriguing to us is that you have this laundry list of fears - higher interest rates, weak housing, slowing economy - yet the market is making new highs," Todd Salamone, director of research at Schaeffer's Investment Research, told CNBC.com. "A lot of those fears are being factored into the market via heavy shorting activity."
"I think there is an overhang from the subprime sector and that willl take some time to play out," said Peter Andersen, portfolio manager at Dreman Value Management. "That's a kink in the chain and until that is played out, there will be some volatility."
Banks & Bernanke
Second-quarter earnings are in full swing with reports from major technology companies including Intel, Google, eBay, Yahoo and IBM, but given the subprime mess, it is aslew of reports from regional banks that appears to be causing the most worry.
"If you are a financial institution, you've got some issues," said Richard Suttmeier, chief market strategist at Rightside.com. "I can't see them saying all is better than the quarter before with the real estate and mortgage issues we're facing. No one's talking about the money banks have lent to home builders to build more homes. If you can't sell what's already been built, the inventory will build until something cracks."
A number of large financial institutions including Bank of America, Citigroup, Wells Fargo, JPMorgan Chase and Washington Mutual also report this week..
"The question is how much have they been affected by fallout from the subprime lending crisis," said Martin Weiss, president of Weiss Research. "Next week's earnings will give us an indication of whether the mortgage crisis is limited to a small number of lenders, or if it's affecting banks in general."
Along with earnings, Wall Street this week is getting its share inflation data with both the Producer Price Index and the Consumer Price Index. In addition, inflation will certainly come up when Federal Reserve Board Chairman Ben Bernanke testifies before Congress on Wednesday and Thursday.
"Bernanke's testimony will be one of the big drivers next week," said Frederic Dickson, chief market strategist at D.A. Davidson. "Investors will be expecting him to say some good news about the economy and give his take on inflation."
"I think Bernanke will have to make a statement or answer questions about the mortgage crisis," said Weiss. "The reality is that the housing and mortgage crisis is going to have an impact on how consumers spend money."
Salamone says options expiration next week could also potentially be a market driver. "Thirteen of the last 18 expiration weeks have been positive and we believe that's due to the unwinding of a lot of index put options," said Salamone.