Rally may cool on earnings reality check

By Angela Moon

NEW YORK (Reuters) - Wall Street may take a breather next week after an earnings-driven rally lifted the major U.S. stock indexes to their highest levels in months.

The blue-chip Dow Jones industrial average .DJI popped back above the 9,000 mark this week for the first time since January. And the Standard and Poor's 500 Index .SPX ended Friday at 979.26 -- up almost 45 percent from the 12-year closing low hit on March 9 -- after a number of prominent companies' earnings surpassed Wall Street's expectations.

This week's "market enjoyed the better-than-expected earnings, or I should say, less bad-than-expected earnings, but we can play the game for only so long," said Scott Marcouiller, senior equity market strategist at Wells Fargo Advisors in St. Louis.

"Stay cautious. We can't put a cap on it (the rally) yet, but there will be a correction."

The exuberance was interrupted Friday as disappointing quarterly revenues from Microsoft Corp (MSFT.O) and Amazon.com (AMZN.O) hit their stocks and weighed on the Nasdaq, which fell on Friday and halted a 12-day run of gains.

In contrast, both the blue-chip Dow average and the S&P 500 ended Friday's session at eight-month closing highs.

The earnings blitz will continue next week, with about a third of the S&P 500 companies expected to report results, including such high-profile names as Exxon Mobil Corp (XOM.N) and Walt Disney Co (DIS.N) Both are also Dow components.

TUNING IN TO BERNANKE

Wall Street and Main Street are likely to tune in when Federal Reserve Chairman Ben Bernanke appears on PBS next week in a town hall-style forum called "Bernanke on the Record," hosted by Jim Lehrer.

After being grilled repeatedly on Capitol Hill about the troubles continuing to roil the nation's economy, Bernanke will talk about the Fed's response to last year's economic crisis and its role in economic recovery. The program, which will be recorded on Sunday at the Federal Reserve Bank of Kansas City, will be broadcast on "The NewsHour with Jim Lehrer" on PBS on Monday, Tuesday and Wednesday; a one-hour special will be aired on or after Wednesday, PBS said.

Investors will get the first look at second-quarter GDP growth on Friday. New home sales, consumer confidence and durable goods orders are among the major indicators on tap.

A MORE SOBER LOOK AT EARNINGS

Investors have thrived during this earnings season by accentuating the positive -- better-than-expected growth in earnings or the bottom line -- and ignoring the negative -- poor growth in revenue or the top line.

But investors' euphoric response so far makes it more likely, some analysts said, that the market may take a breather as earnings season grinds on.

"We will continue to see stronger-than-expected earnings next week, but the impact on the market would be probably subdued because we have rallied so much, so fast," said John Augustine, chief investment strategist at Fifth Third Asset Management in Cincinnati.