Wall Street digests its first batch of quarterly earnings reports in the coming week, but jitters about inflation and interest rates are likely to remain a factor, analysts say.
In the week to Friday, stock indexes rallied to multiyear highs but faded late in the week as longstanding concerns about inflation returned to the forefront.
The blue chip Dow Jones Industrial Average managed a modest gain for the week of 0.10 percent to 11,120.04.
The broad-market Standard and Poor's 500 index, which notched a five-year high during the week, also posted a slim gain of 0.05 percent to 1,295.50.
The tech-heavy Nasdaq, which also hit a five-year high in the past week, ended virtually flat with a modest 0.03 percent loss to 2,339.02.
The main stock indexes had been on track for solid gains for the week but made an abrupt turn after a stronger-than-expected report on US payrolls growth revived fears about an overheating economy that might prompt the Federal Reserve to slam on the brakes.
The Labour Department reported the US economy created 211,000 jobs in March, more than the 190,000 expected by economists. The unemployment rate also ticked lower to 4.7 percent.
The report sent the benchmark 10-year bond yield within striking distance of 5.0 percent, prompting capital flows out of equities and into the bond market.
The yield on the 10-year US Treasury jumped to 4.963 percent from 4.853 percent a week earlier and that on the 30-year bond rose to 5.038 percent against 4.893 percent. Bond yields and prices move in opposite directions.
"People are asking themselves why they should be in the stock market if they can get a five percent return safely" in bonds, said Todd Leone, head of listed trading at SG Cowen.
The first batch of earnings reports will be released starting with aluminium maker Alcoa on Monday, but rate jitters remain in the minds of investors.
Investors are concerned about how far the Federal Reserve lifts its base interest rate, currently at 4.75 percent after 15 consecutive quarter-point rate hikes. Some fear that too many more hikes will choke off economic and profit growth.
Nigel Gault, economist at the research firm Global Insight, said that "with inflation worries moving to the fore," the market is sensitive to details of economic data.
"With the unemployment rate edging down again, the Fed will remain concerned about tighter 'resource utilisation' threatening higher inflation down the road," he said.
"The overall picture - robust growth, with some threat of higher inflation - suggests that the Fed will raise interest rates at least two more notches, to 5.25 percent by the end of June." Still, some analysts say the stock market has shown resilience in the face of bad news, and that another rally leg could develop with the right catalyst.
"We are starting to become very bullish on stocks for two simple reasons: earnings and interest rates," said Kent Engelke, market strategist at Anderson and Strudwick.
"If the Fed is about to pause ... and if profits materialise we then think there is a strong probability of a double-digit gain for equities for 2006."
Others say the recent rally appears to be running out of steam and that the best possible scenario would be modest gains.
David Briggs, strategist at Federated Investments, said that to believe in a further rally "would require 'the triumph of hope over experience,'" in the words of 18th century poet Samuel Johnson.
"To move up sharply and hold those gains, the market will need a major catalyst. Based on what we know now, it's hard to see what that catalyst might be."
Briggs said the economy is expected to slow, along with corporate earnings.
"Stocks may be able to grind higher, but the pattern of the last two years is likely to prevail," he said.