NEW YORK ( TheStreet) -- Look for the case of earnings myopia that sent markets higher this week to get a severe test when Wall Street reconvenes on Tuesday. Nearly 10% of the S&P 500 will open their books during the four-day holiday shortened trading week, including Dow components Bank of America ( BAC), General Electric ( GE), and International Business Machines ( IBM), as well as Apple ( AAPL) and Google ( GOOG), which respectively account for 20.7% and 4.4% of the market cap-weighted Nasdaq-100 index. This week was just a warm-up. The Dow rose just under 1%, and the good feelings continued as the "Santa Claus Rally" passed the baton to the "January Effect" and stocks marched higher for a seventh week in a row. And while recent economic data has provided some cause for concern -- from last Friday's middling jobs report to today's reads on consumer prices and retail sales; both of which were slight disappointments -- Wall Street doesn't seem too concerned because it's got a slew of earnings headlines to trade off for the next month and a half. Add in that the Federal Reserve continues to pledge to follow through on "QE2" and Chairman Ben Bernanke's prediction that the U.S. economy will grow as much as 4% in 2011 and it's easy where the euphoria is coming from in the short-term. Further out, the picture is much more muddled but for now, there seems to be a nice little stretch where it's safe to be bullish about stocks ... as long as the earnings reports cooperate. That's where things could get interesting. The action this week provided some clues. Alcoa ( AA) got at least partial credit for the market's rise on Tuesday as it supposedly kicked off earnings season on a strong note. But the stock lost ground in the three sessions following its report and ended the week down 2.7%. Intel's ( INTC) numbers got a warm inital reception, and were credited with boosting the semiconductor capital equipment makers as well, but the stock, which is coming off a forgettable flat performance in 2010, was down 1% when the closing bell sounded on Friday. So it's early but there's evidence that simply beating earnings estimates may not be enough, given how far the market has come since the start of December.
Remember, for the third quarter ended in September, a whopping 70% of companies in the S&P 500 beat the average analysts' profit view, according to Thomson Reuters data. Now the official line is that Wall Street is expecting earnings growth of 32% from the S&P 500 in the fourth quarter, but using the third quarter as a guide, let's be honest, it's really expecting a heck of a lot more. That's why JPMorgan Chase's ( JPM) report got folks so excited Friday. It was a strong beat and the market needs the banks to outperform in order to move higher from here. More than $34 billion of the estimated $206.2 billion in earnings projected for the S&P 500 in the fourth quarter is supposed to come from the financials. Since Oct. 1, the financials have seen earnings expectations rise almost 9%, more than any other sector. Now the stock prices are starting to come along for the ride. Investors have been snapping up shares of Bank of America ( BAC), rising 11% so far in 2011 and 35% since the start of December, and Citigroup ( C), which has advanced 6.6% since the start of the year and finally managed to close above $5 for the first time in 15 months this week. So for now, at least from a trading standpoint, things look pretty good. On a day-to-day basis, it's hard to just point to unemployment and $90-plus oil and stay out of stocks entirely. But investors also need to remember though that the calendar has turned over to 2011, and earnings growth expectations for the current year are much lower. Wall Street sees profits rising 13.1% in the first quarter followed by 11.3% growth in the second quarter, the same period when "QE2" is set to end, coincidentally. Part of it is the year-over-year comparisons are going to get tougher. For example, the S&P 500's financial components earned a measly $2.4 billion in the fourth quarter of fiscal 2009, according to Thomson Reuters as the big banks scrambled to pay back bailout funds and bad mortgages were still on the upswing.
But most of the lower expectations for the current year are the result of Wall Street concluding there isn't much more that corporate America can do to boost profits if revenue doesn't start growing as well. And that's going to require some of the structural difficulties of the economy -- the lackluster housing market, high energy prices, long-term joblessness -- to show signs of improvement. This week could tell a good part of the tale for 2011, at least how the market fares in the first half. Caution about yearly outlooks, or projections that are just in-line or slightly above what Wall Street is looking for may not lead to steep sell-offs but they could very well be red flags to get out while the getting is good. Of course, there may not be that much to worry about if the Fed's willing to step in with "QE3" as some market observers already suspect will happen. "When QE2 ends in June, the economy is in danger of returning to slow growth mode unless its structural problems are addressed," says Madeline Schnapp, the director of macroeconomic research at TrimTabs, in a statement on Friday. "We expect the Fed to engage in more quantitative easing until investors are no longer willing to loan money to Uncle Sam at low rates." So there you go, maybe the market's case of earnings myopia isn't cause for concern after all. Either way, next week should open a lot of eyes. -- Written by Michael Baron in New York. >To contact the writer of this article, click here: Michael Baron. >To submit a news tip, send an email to: email@example.com