Weebles wobble but they don’t fall down—and the same might be said of the stock market.

There was certainly a lot of wobbling, as the Nasdaq Composite, in particular, threatened to break down. The tech-heavy benchmark rose 0.2% to 6,135.08 last week despite closing on Thursday at its lowest level since May. The Dow Jones Industrial Average rose 64.71 points, or 0.3%, to 21,414.34, while the Standard & Poor’s 500 index ticked up to 2425.18.

Low bond yields and central-bank asset purchases have tamped down volatility in both the economy and the market, says Evercore ISI strategist Dennis DeBusschere, and that, in turn, has helped increase stock valuations. How much of a boost valuations have gotten, however, is unknown. The upshot: “That unwinding process runs the risk of increasing volatility and increasing headwinds for the market multiple,” DeBusschere says.

That doesn’t mean the market needs to drop, but it does put the onus on profit growth. With rates rising and multiples under pressure due to tighter monetary policy, it might take more than your run-of-the-mill earnings beat to send stocks higher, says UBS strategist Julian Emanuel, who will be closely watching Friday’s bank earnings; Citigroup (ticker: C), JPMorgan Chase (JPM), and Wells Fargo (WFC) are set to release. How the stocks react could go a long way toward determining whether the market can continue to push higher. “Friday could be the most important trading day of the year,” Emanuel says.

We got a preview of how that could play out last week, when Costco Wholesale (COST), which trades at 24.7 times 12-month forward earnings, reported what appeared to be top-notch same-store sales, but fell 2.5% over the last two days of the week.

The good news is that the weaker-than-expected economic data that seemed to be a permanent part of the landscape appear to have finally started to turn upward. Last week, for instance, the U.S. economy added 45,000 more jobs than predicted, says HighMark Capital Management Director of Research Todd Lowenstein, while the Institute for Supply Management’s manufacturing and services indexes were both stronger than expected. But more of that will be needed. “We could be stuck until the weight of data kicks in,” he says.

(Source: Barrons Online)