Fair to say the recent rally -- which was inching forward midday Wednesday -- has been a bottoms-up affair. That is, it is based mainly on positive corporate earnings rather than economic data, which have painted a far less upbeat picture. This dichotomy between the micro and macro has some questioning the sustainability of the rally and even its very basis.

The good news for those long stocks is that of the 255

S&P 500

components reporting quarterly results through Wednesday morning, earnings results were 6.6% above consensus estimates, according to Chuck Hill, director of research at Thomson Financial/First Call. (Those figures include better-than-expected results released late Tuesday and early Wednesday by S&P 500 components such as

Amgen

(AMGN) - Get Report

,

eBay

(EBAY) - Get Report

,

AOL Time Warner

(AOL)

,

AT&T

(T) - Get Report

and

Bell South

(BLS)

.)

On the basis of actual results and consensus estimates for firms yet to report, First Call forecast first-quarter earnings will be up 11% vs. year-ago results, possibly in excess of 12%.

"It's a good quarter relative to

both expectations and year-over-year growth," Hill said. "The germane question isn't 'are we beating estimates?' -- we always beat

them -- but are we beating them more or less than normal? This time, there are reasons to get excited, because we're beating them more" than the 2.7% average of the past nine years.

Also, analysts have reacted positively to first-quarter results and guidance, the researcher noted, contrasting nearly every reporting season in recent years. "Each day goes by and we're not seeing a whole lot of erosion in second- and third-quarters numbers, we're feeling better we're not going to see that slashing occur," he said. "That may be the best news of all."

First-quarter earnings and guidance have buoyed shares because there was so much concern about how the prelude and prosecution of war in Iraq would affect corporate results. Concurrently, the tightening of spreads between yields of corporate bonds and Treasuries provides another market-based indicator that better times are ahead.

"If geopolitical uncertainties kept a lid on economic growth," they should be alleviated by the relatively quick fall of Saddam Hussein's regime and joint talks between the U.S., China and North Korea, said Kent Engelke, capital markets strategist at Anderson & Strudwick. "If we're generating revenue

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growth in this environment, what happens if the economy picks up?"

While skeptical that geopolitical concerns really restrained the economy, Engelke nevertheless believes "positive surprises" will be a theme of 2003. With first-quarter profits up 11% or more, "companies will have more money to spend and that will increase economic activity," he said. "I believe we can have 3.5% to 4%

gross domestic product growth" in the second half of the year.

Unwittingly (methinks), Engelke hit upon a big chink in the bullish "better-than-expected earnings" armor: Earnings growth doesn't necessarily mean corporations will have more money to spend, should they chose to do so.

"The biggest negative

of the reporting season is lackluster revenue growth," said First Call's Hill. "Most of the earnings growth is still coming from cost-cutting, and you can only do that for so long. Eventually you've got to start seeing some better top-line growth, and that hasn't happened yet."

First Call estimates first-quarter revenue growth will approach 4% for the S&P 500, "a far cry from 12% or thereabouts" for earnings, he said.

Macro Points South

Engelke believes the market's current momentum could take the

Dow Jones Industrial Average

above 9000 by Memorial Day, a move which would likely spark further buying to as high as 9500. If at that point the data are not showing growth, "we could see the market go back to 8500" rather quickly, he said.

Short-term, optimism about earnings "might soon be overshadowed by Friday's GDP data and its implications for the May 6" Federal Open Market Committee meeting, the strategist added.

The consensus estimate is for the advance report to show GDP grew 2.3% in the first quarter. Though not recessionary, that's certainly considered subpar growth, and it would undermine the bullish case, especially given that the GDP report follows a string of lackluster economic data.

In March, industrial production fell by 0.5% and capacity utilization was a paltry 74.8%. Meanwhile, the four-week moving average of jobless claims hit a seven-month high of 425,000 for the week ended April 12, indicating continued hemorrhaging in the labor market. The Fed's Beige Book, released Wednesday afternoon, reported overall "lackluster" economic activity, as well as ongoing weakness in manufacturing, a "cautious attitude" toward business spending and a "slump" in commercial real estate.

"Even without war, this economy was likely headed back into recession," Dave Hunter, chief market strategist at Kelley & Christensen, recently commented. "Those who are betting on an improving economy

now that the war is over could be very disappointed."

Offering one of the most draconian views on Wall Street, Hunter forecasts 2003 could be "the weakest economy" since 1945, characterized by sharp drops in consumption and employment, a major banking crisis and outright deflation.

"Certainly we could see a brief rebound, but there are structural problems in this economy that will not disappear with the war," he wrote, citing excesses generated in the bubble and its aftermath, including humongous debt burdens at the corporate, consumer and (now) government levels.

Optimists dismiss such Cassandra-like predictions and are inclined to dub recent economic data "backward looking." Indeed, the first-quarter GDP and other reports mentioned above don't incorporate any presumptive postwar bounce, including the salutary effects of declining oil prices. (Crude futures were down 3.9% to $26.90 as of 2:09 p.m. EDT after the Energy Department reported a 3.3% increase in inventories and OPEC warned of a possible "glut" of oil.)

Fair points. Trouble is, even leading economic indicators continue to suggest sluggish economic growth going forward. On Monday, the government reported that its Index of Leading Economic Indicators (LEI) fell 0.2% in March, its second consecutive monthly decline, and February's decline was revised to 0.5% from 0.4%.

The Economic Cycle Research Institute's weekly leading index fell to 119.5 from 120.4 for the week of April 11, the most recent update. However, the index's four-week moving average jumped to 0.5% from negative 0.2%

"The growth rate tells us that the index as a whole has made up for the ground it lost due to war jitters," Anirvan Banerji, ECRI's research director and a

RealMoney.com

contributor, said in a statement. "It looks as though we are back on track for a continuation of the subpar recovery we had earlier in 2002."

Subpar being the operative word, and one in stark contrast to the current optimism evident on Wall Street.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.