NEW YORK, April 7 (Reuters) - The stock market's robust rally was slowing even before Friday's jobs report, but the red flag sent up by the weak payrolls data makes the path to more gains less secure.
It means the bulls will have to look to earnings for a way to keep the rally going. The S&P 500 hit an all-time closing high on Tuesday, but lately defensive stocks have been leading the charge, and notable growth indexes are slipping.
This rotation has many thinking the long-awaited market correction is nigh. A 3 percent decline in the Russell 2000 index last week seemed to be a confirmation of the trend.
"Momentum I think has been slowing a bit, and it would be interesting to see if this is just a one-session sell-off," Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, said about Friday's decline.
In the first quarter, the benchmark's healthcare index added 15.2 percent and utilities gained 11.8 percent, besting the broad S&P 500's 10 percent gain.
The transition into defensive stocks may respond to investors' taking into account the effect of higher payroll taxes this year and the $85 billion in government spending cuts that started to trickle at the beginning of the year.
The shift is "a rotation into sectors less affected by a short-term slowdown in the consumer," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.
EARNINGS HOLD THE KEY
Earnings season starts in earnest this week, with the highlight coming from JPMorgan Chase & Co and Wells Fargo & Co on Friday. Details on Wells Fargo's earnings will be dissected for clues on the health of the housing market.
Overall, S&P 500 earnings are expected to have risen 1.5 percent last quarter, down from a 4.3 percent gain expected at the start of the year, according to Thomson Reuters data.
Investors "are really waiting for the earnings season on balance to disappoint," Zaro said.
Companies have caught up on the lowered expectations, and negative outlooks have been predominant ahead of earnings season. In fact, the negative-to-positive guidance ratio from S&P 500 companies is at its highest since the third quarter of 2001, according to Thomson Reuters data.
At 4.7, the ratio is the sixth-highest among 69 readings dating to 1996.
"Companies understand that since the economy is weak there's no reason to be a hero and give guidance you can't beat," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.
F5 Networks was the latest and one of the most dramatic examples of lowered earnings expectations. The network equipment maker partly blamed lower government sales for its profit warning late on Thursday, which erased almost a fifth of its market value on Friday.
In past quarters, revenue beats have taken the focus off the bottom line as investors were expecting the stronger economy to translate into more sales, but that may not be the case this time around.
"At this point earnings are going to be perhaps more important than revenues only because we know Q1 was only a so-so quarter for the economy," Colas said.
"It's not going to be a surprise if revenues are a little bit light. Where we really have to make sure the numbers work is at the earnings level."
BUSY WEEK FOR THE FED
The Federal Reserve could be this week's wild card. Indications of renewed support for lose monetary policy - or the slightest hint in the direction of tightening - have triggered wild moves in the market.
The minutes of the March FOMC meeting are due on Wednesday and market participants will look for insight into the debate regarding the amount and duration of bond purchases the U.S. central bank is executing monthly.
The hawkish argument - a reduction of stimulus - was dented by Friday's job report, so any mention of it in the minutes may not trigger panic. But more than a dozen speeches by various Fed officers this week could stir things up.
The economic reports calendar is light except for consumer data. Retailers are expected to post a 1.9 percent rise in sales for last month, compared with a gain of 2.9 percent in March last year when same-store sales figures are published Thursday.
The Commerce Department posts its own retail sales figures on Friday, followed by the Thomson Reuters/University of Michigan survey of consumers.
Wall St Week Ahead runs every Sunday. Comments on this one can be sent to Rodrigo.Campos(at)thomsonreuters.com.