Bulls showed their determination Tuesday, as a sharp rebound in oil led to nothing but a short round of profit-taking before buyers resurfaced. Except for the

Dow

, the main indices ended higher, with continued optimism about second-quarter earnings taking the

S&P 500

near a four-year high.

Crude oil futures closed up $1.70 to $60.62 a barrel on Nymex, as Emily, yet another tropical storm, revived concerns about production in the Gulf of Mexico.

The surge in oil provided an early and in some quarters welcome pause that allowed traders to take profits. The market, which saw major indices rebound 3.5% on average in the wake of the London bombings last Thursday, needed a breather.

Welcome or not, the pause was short-lived. Bulls, emboldened by strong earnings reports from

Genentech

(DNA)

and

PepsiCo

(PEP) - Get Report

and positive guidance from

Alcatel

(ALA)

, charged again.

The upward momentum briefly sent the S&P 500 above the March 7 close of 1225, the index's best finish since 2001. The S&P 500 settled up 2.77 points, or 0.23%, at 1222.21.

The Dow Jones Industrial Average, meanwhile, finished fractionally lower, down 5.83%, or 0.06%, at 10,513.89. The blue-chip index was weighed down by

Boeing

(BA) - Get Report

,

Caterpillar

(CAT) - Get Report

,

3M

(MMM) - Get Report

and

United Technologies

(UTX) - Get Report

.

The

Nasdaq Composite

continued to power ahead, advancing 7.72 points, or 0.36%, to 2143.15, after breaching the key 2100 resistance on Friday. The move comes ahead of key earnings from the likes of

Apple

(AAPL) - Get Report

and

Advanced Micro Devices

(AMD) - Get Report

on Wednesday.

Expectations Game

The second-quarter earnings season should help resolve an ongoing debate between Wall Street analysts about the profit outlook for the rest of the year. Some have argued that companies have been feeding analysts conservative guidance, expecting to surprise to the upside.

Merrill Lynch market strategist Richard Bernstein thinks differently. He says that at this point in a profits cycle (when growth is decelerating), analysts typically lower about 20%-30% more estimates than they raise. Today, they are raising 20%-30% more estimates than they are lowering, he told clients.

Cyclical companies, according to Bernstein, always tell analysts and shareholders that they are no longer cyclical toward the peak of a cycle. They promise they'll lower debt, improve productivity and manage inventory more efficiently. "The stories of reduced cyclicality are once again being recycled (no pun intended), and we think investors should be wary," he says.

In addition, as mentioned by Merrill economist David Rosenberg back in mid-June, consensus earnings estimates for this year had not taken into account the profit-reducing strength of the U.S. dollar. Several companies, such as

Oracle

(ORCL) - Get Report

two weeks ago, already have shaved their earnings forecasts due the offset of the stronger-than-expected dollar.

Deutsche Bank Chief Investment Officer Benjamin Pace believes the dollar will soon weaken again as it becomes clear that the

Fed

is close to ending its rate-hike campaign, and the current account deficit comes back to haunt the currency. The dollar did weaken to a one-month low against the euro on Tuesday, ahead of the May trade-deficit number, which will be released Wednesday.

The interest rate outlook is pretty much the key separation between the consensus view of Wall Street analysts and the view at Merrill. "Although many investors are encouraged that the Fed might soon stop tightening monetary policy, we are not so sure," says Bernstein.

The Fed, indeed, has given no indication that it intended to even pause, and recent economic indications -- such as consumer confidence, retail sales and the June employment report -- give the central bank all the more reasons to continue raising rates.

For Merrill's Bernstein, the market is equating low global inflation expectations with the end of rate hikes, which would provide a relief to earnings and stock prices. But he calls that logic faulty.

More than 12 months after the Fed began nudging rates higher, the lagging pull on the economy -- and on profits -- should only start to be felt about now.

Inflation pressures have indeed picked up recently, but with the expected slower growth in the second half of the year, they should not gain much momentum, Merrill's Rosenberg and Bernstein believe. That should keep bonds attractive in the second half.

Yet, based on a recent Merrill survey, only 9% of fund managers believe interest rates will be lower a year from now. U.S. bonds are now the least-liked asset group by global asset allocators.

The benchmark 10-year bond fell again on Tuesday, losing 10/23 while its yield rose to 4.14%. The move comes ahead of key consumer and producer inflation data on Thursday and Friday, and of Fed Chairman Alan Greenspan's semiannual testimony on Monday.

Likewise, defensive sectors -- such as utilities and consumer staples -- are the most underweighted by asset allocators. "Given these strong consensus views, anyone with even a tiny contrarian streak should probably sit up and take notice," Bernstein says.

However, the market's rebound over the past four sessions -- characterized by riskier bets on technology and small-cap stocks -- suggests the consensus might be right this time.

To view Gregg Greenberg's video take on today's market, click here

.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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to send him an email.