There was reason for cheer when Fed chief Alan Greenspan gave his semiannual testimony on the state of the economy to the Senate Banking Committee Thursday.

It was, in the context of the chairman's generally ambivalent speeches, remarkably positive. Greenspan seemed genuinely optimistic about the possibility that recent productivity gains are permanent, which would mean that the economy can grow at a quicker pace without inflation. He suggested that inflation was well in hand. And he generally conveyed the idea that, while the Fed sees the balance of risks weighted toward inflation, it will not raise rates unless the economic data suggest it needs to.

This was wonderful stuff for stocks. The

S&P 500 tacked on 0.9% and the tech-heavy

Nasdaq Composite Index lifted 3.2%. Life was swell.

But not for too long, and that has got people concerned. Stocks gave back much of their gains Friday and ended down on the week. Greenspan's kind words were not, it seemed, worth that much to the market. When good news doesn't have that profound an effect, people start to think the market is oversold -- set for a hard slog if not a fall.

"I think the market is going to struggle," said Jim Volk, co-director of institutional trading at

D.A. Davidson

in Portland, Ore. "I can't get too excited; I don't see a lot of good news on the horizon."

Though second-quarter

earnings will continue to flow in (though at a somewhat abated pace from the past week), investors will keep as much of an eye on what's going on with the economy, and in the minds of the members of the

Federal Open Market Committee, the Fed's interest-rate-setting body.

"What Greenspan basically said is, they're in wait-and-see mode," explained Josh Feinman, chief economist at

Deutsche Asset Management Americas

. "They don't feel a great urge to tighten, but they are still concerned that things may not be cooling down enough and that the labor markets remain tight. You have to have a very open mind when you're talking about the Fed this year. And watch the data."

And two very important pieces of data are due out in the coming week: the second-quarter

Employment Cost Index

on Thursday and second-quarter

gross domestic product

on Friday. The former is probably the more important. The ECI measures the cost of labor and is considered one of the best leading indicators of inflation. It is also believed to be a Greenspan fave. Most economists reckon the ECI ticked up about 1%, though some think that a pickup in benefit costs will make it even stronger than the first quarter, when it tacked on 1.4%.

Plenty of Good News Already Priced In

Treasury market participants reckon that both reports would need to be quite good to boost the market. As with stocks, bonds have a lot of good news priced into them already.

"I think we've allowed for all the favorable news one could think of in the market," said Kevin Flanagan, money-market economist at

Morgan Stanley Dean Witter

. "At best, these figures could be neutral."

This kind of backdrop makes for a difficult stock market -- particularly in the context of an earnings season in which many companies have been cautious about future profit growth.

"There is some skepticism about year-over-year earnings growth," said Carl Bhathena, vice president at

Holland Capital Management

in Chicago, who reckons that a tougher economic environment may be separating the corporate wheat from the corporate chaff.

"The market is really starting to differentiate between companies," he said. "Companies with higher-quality management are really starting to show they can deliver top- and bottom-line growth, while others are starting to struggle."

It's nothing new for an active money manager to say it's a stock picker's market, but Bhathena says he's making more money this year than he did last, which was more about hot sectors than hot companies. Maybe he's got a point.