NEW YORK – A healthy but not overheated reading of the U.S. employment scene this week should be all that's needed to keep the current stock market rally alive.
If, however, Friday's U.S. payroll report is strong enough to suggest the Federal Reserve's interest-rate-raising campaign has further to go, the surprising pace equities maintained through the first quarter could quickly peter out.
While investors will clearly be focused on that week-ending data, they will have plenty of other figures to digest through the week, including key readings on auto and retail sales for March.
U.S. benchmark stock indexes had their strongest first-quarter finish in years Friday, boosted by a continued rally in small-cap shares, even as the Federal Reserve raised the benchmark lending rate to 4.75 percent.
Now, managers and analysts say, stock gains may slow until investors scan every major economic report in coming weeks to gauge whether the economy continues to expand amid high energy prices, without sparking inflation.
"We might see a little pause for assessment on stocks" this week "ahead of the jobs report," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "From now on, stocks will rise only if investors continue to believe, just like the Fed, that the economy is solid and may absorb higher rates."
The week starts with a government report on manufacturing in March, with the Institute for Supply Management index, also called the ISM index, due Monday at 10 a.m. EDT . Economists polled by Reuters forecast an increase in the ISM index to 57.9 in March from 56.7 in February.
Also Monday, automakers will report their sales for March, with the data expected to show that top U.S. car makers General Motors Corp. and Ford Motor Co. again lost market share to Asian rivals like Toyota Motor Corp.
Then, Thursday, U.S. retailers will report monthly sales. When reporting February's results, a number of chains dampened expectations for March, saying the late date for Easter would weigh on sales.
But the week's biggest economic report will come Friday at 8:30 a.m. EDT when the Labor Department will release the number of nonfarm jobs added to the U.S. economy in March. Economists forecast an increase in payrolls of 190,000, down from a jump in February, when 243,000 positions were added.
"All eyes will be on the jobs report," said Chris Rupkey, senior economist at the Bank of Tokyo-Mitsubishi. "The Fed is still worried with inflationary pressures, and may very well not be done with rates. But as long as the economy keeps growing without a substantial pickup in inflation, we may see bonds falling and stocks rising."
Last week, U.S. stocks fell Tuesday after the Fed raised the benchmark lending rate for a 15th straight time. In the first meeting since Ben Bernanke took over as Fed chairman, the central bank repeated that further policy firming may still be needed.
Small Caps Rally
At Friday's closing bell, U.S. stocks also fell.
But building on their strong January start, the Dow Jones industrial average had its best first quarter since 2002 and the Standard & Poor's 500 Index sailed to its biggest first-quarter gain since 1999. Meanwhile, the Nasdaq hit its best first-quarter finish since the Internet bubble burst in 2000.
For the first quarter, the Dow rose 3.66 percent, while the S&P 500 advanced 3.73 percent, and the Nasdaq Composite Index jumped 6.10 percent.
The rally was led by small-capitalization stocks, with the Russell 2000 index of small-cap stocks ending the first quarter with its best quarterly close in 15 years. The latest stretch of the small-cap sector's outperformance over large-cap stocks began in 1999.
"Everybody was expecting bigger companies to outperform in the first quarter, but gains came precisely from the group of stocks that seemed more vulnerable to higher rates and higher energy prices," Wells Capital's Paulsen said. "This tells me that they may very well beat the rest of the markets again in coming months."
For the past week, the major stock indexes turned in a mixed performance: The Dow fell 1.51 percent and the S&P 500 inched down 0.62 percent, but the Nasdaq gained 1.17 percent.
Earnings Growth and Oil
Earnings of S&P 500 companies in the first quarter are projected to rise about 11 percent over the same period a year ago. Companies in the energy and health-care sectors are expected to show the largest year-over-year earnings gains, 48 percent and 19 percent, respectively.
"If you forget about rates for one second, the only thing really moving this market is energy," said Michael Metz, chief investment strategist at Oppenheimer Holdings Inc. "Actually, higher energy prices are a bigger risk to the economy and to corporate America than higher benchmark rates."
On the corporate front, a few mid-sized and large S&P 500 companies are expected to report earnings this week: home furnishings and housewares retailer Bed Bath & Beyond Inc. ; seed and biotech concern Monsanto Co.; beer, wine and spirits maker and distributor Constellation Brands Inc. and the No. 2 U.S. greeting cards manufacturer, American Greetings Corp.
Wall Street will keep an eye on the price of crude oil.
Last week, U.S. crude oil prices climbed above $67 a barrel and approached two-month highs, partly on fears that tensions with Iran over its nuclear ambitions might disrupt supplies. NYMEX May crude oil ended at $66.63.