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Bad earnings news could dampen hopes for a spring recovery and trip up a three-month rally in the coming week, but lately investors have shown more interest in focusing on any bit of positive news to send equities higher.

Fourth-quarter earnings season kicks off with




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reporting quarterly results Tuesday, while the end of the holiday season means that last-minute earnings preannouncements could flood the market. Many of the nation's retail chains will report their December numbers on Thursday, while the government's monthly data release is scheduled for Friday. Both days should provide clues about the health of earnings and consumer activity.

Stocks continued to move higher last week, stretching the rally that began in the fall into 2002. Very little has been able to stop the major indices from climbing the past three months, as investors bet earnings and the economy will begin to show strong signs of recovery in the first half of the year.

Since Sept. 21, the

Nasdaq is up 45%, the

Dow Jones Industrial Average has gained 25%, and the

S&P 500 is 21% higher.

"We've had a tremendous run," said Peter Boockvar, market strategist at Miller Tabak. "The market just keeps going. It's been overextended for a while. What will stop it is earnings news over the next few weeks."

Crunching Numbers

Alcoa is always the first of the Dow components to issue earnings, but aside from the aluminum producer, next week's reporting lineup is slim. The company ratcheted down its expectations in mid-December, and analysts now expect earnings of 10 cents a share for the fourth quarter. Alcoa earned 45 cents in the year-ago period.

Other companies scheduled to report next week include B2B software outfit


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on Monday, and

Sun Trust Banks

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and consulting firm


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on Wednesday.

But the real concern for next week surrounds last-minute warnings.

"It'll probably be pretty heavy on preannouncements next week," said Ken Perkins, research analyst at earnings tracker Thomson Financial. "A lot of companies were waiting to get past the holiday season, waiting for the year-end."

A tally of fourth-quarter earnings warnings so far suggests that the worst may be behind corporate America. The number of negative warnings, or announcements that earnings would fall short of targets, fell to 553 in the fourth quarter from 681 at this time in the third quarter and 702 in the second quarter, according to Thomson Financial data. Meanwhile, upward revisions of Wall Street's estimates now account for more than half of all earnings forecast revisions, according to Salomon Smith Barney strategist Tobias Levkovich.

The problem, Levkovich said, is that those upward revisions come on top of overly pessimistic downward revisions following Sept. 11. For example, experts projected in November that earnings in the information technology sector would grow 45.5% in 2002 vs. 2001. In August, analysts were looking for the group's earnings to increase 57.6%. Now, earnings are expected to grow 63.1% this year.

The Spending Trend

Retailers are particularly liable to warn at the end of the week, when the December

chain store sales and

retail sales reports are released, Perkins said.

Weekly reports show that holiday spending was stronger than many retailers were expecting, as deep discounts in stores and on car lots kept buyers busy. But the December chain store sales and retail sales report will provide more definitive looks at that sector.

Josh Feinman, chief economist at Deutsche Asset Management Americas, said he expects positive GDP growth in the first quarter of next year, and that a reading of 0.3% or 0.5% growth in retail sales, excluding the red-hot auto sector for December would be consistent with that outlook. Economists expect the headline number, which includes automobiles, to fall this month because of a decline in vehicle sales.

Ultimately, the real question is where consumer spending goes from here, and that may hinge on whether companies continue to offer incentives and discounts, and consumers continue to take the bait. January is typically a clearance month, but stronger-than-expected sales in December may have cleared out inventories ahead of time.

Of course, buyers have led the way so far in 2002, and they may decide next week that they would rather ride out the bad times with stocks in their hands, rather than worry about missing the boat altogether.