With about two-thirds of the reports in, we can safely say that first quarter earnings season has been better than expected, belying pre-season concerns about margins and the impact of Japan. This earnings strength pushed stocks to new highs in recent days. But stocks will need more than just earnings strength to make new highs from here onwards.

The most important catalyst for stocks at this stage will be reassurance on the economic recovery front. And nothing will prove more reassuring than evidence that a labor market recovery is underway. We have a slew of labor market reports coming out this week, with the April non-farm payroll report on Friday capping it all.

While some positive or negative earnings-related moves cannot be ruled out, I would expect stocks to essentially remain in a wait-and-see mode ahead of the Friday jobs report.

We found last week that the economy’s growth momentum decelerated in the first quarter. The dominant view in the market at present, with which I agree, is pinning the blame for the slowdown on transitory factors. Estimates for GDP growth rates for the current and subsequent quarters have held up at this stage, with the labor market recovery a key contributing factor in that favorable view. A negative surprise this Friday will materially damage that view.

On the earnings front, while the reports thus far have come ahead of expectations, we still have some way to go before we close the books on the first quarter. We had a solid top- and bottom-line beat from MasterCard (MA) this morning. But Archer Daniels Midland (ADM) only managed to come inline with earnings expectations, as the agricultural product processor’s top-line beat appears to have been offset by margin weakness. Pharma giant Pfizer (PFE) beat modestly on EPS, but revenue came below expectations.

More than earnings reports, it is the wait for the Friday jobs report that will drive trading the rest of this week. Stocks will find it difficult to sustain recent gains if we get a negative surprise on Friday.
ARCHER DANIELS (ADM): Free Stock Analysis Report
MASTERCARD INC (MA): Free Stock Analysis Report
PFIZER INC (PFE): Free Stock Analysis Report
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