Relieved by progress made to contain the government debt crisis, the flip-flopping U.S. stock market rallied last week to move within 1.4% of a fresh 2011 high. But gold climbed, too, for a third straight week to a new record above $1600 an ounce, a hint investors aren’t yet ready to let down their guard.

Late last week, Europe approved a €109 billion bailout for Greece and vowed to finance weaker nations until they can borrow from private lenders. But stateside, Washington continued to debate conditions and proposals—including higher taxes and trillions in spending cuts—for increasing our $14.29 trillion debt ceiling.

A compromise before the Aug. 2 deadline that staves off interest payment defaults might placate the stock market and goose the Standard & Poor’s 500 above its late-April peak of 1364, up from the 1345 level where the benchmark closed Friday. But the longevity of any rally will ultimately depend on whether Washington can craft a plausible longer-term fiscal solution.

A last-minute or disappointing stop-gap deal to raise the debt ceiling could prompt rating agencies to cut the U.S.’ AAA credit rating, or the cut could come when politicians fail to devise a longer-term solution. “The former could have a more negative impact on stocks than the latter, as a delayed downgrade should give investors more time to digest the implications,” notes David Bianco, BofA Merrill Lynch chief U.S. equity strategist. But while a snap rating cut to AA could drive the S&P 500 down to about 1250, Bianco expects any selloff to be short-lived as Treasury bond yields are unlikely to surge much due to the downgrade.

Still, watch how long Europe’s respite lasts. Without interest rate cuts from the European Central Bank, “there’s nothing to counteract the grinding deflation that will have to occur in the periphery in order to equilibrate costs and prices with the rest of the eurozone,” says Michael Darda, MKM Partners’ chief economist. Chinese stocks also have rebounded in four of the last five weeks, adding to the expectation that inflation there will begin to ease and the Chinese economy coasts to a proverbial “soft landing.” But Darda thinks Asia’s largest economy could slow further, and earnings may not rebound swiftly once its central bank stops tightening, what with bank reserve requirements at the harshest level on record and short-term interbank lending rates at an 11-year high.

The Dow Jones Industrial Average ended last week up 201, or 1.6%, to 12,681. The S&P 500 snagged its third gain in four weeks. The Nasdaq Composite Index rallied 69, or 2.5%, to 2859, while the Russell 2000 added 13, or 1.6%, to 842.

IT HELPS THAT U.S. COMPANIES are reporting strong second-quarter profits. So far, companies’ profits are coming in 3.8% higher than analysts’ forecasts, while revenues are surpassing targets by 3%, notes Morgan Stanley. Just 7% of companies have missed their profit marks, and only 9% have fallen short of revenue targets.

It’s a measure of the market’s cowed neutrality—or ambivalence—that stocks rise or fall almost entirely in line with whether they surpass or miss forecasts. According to Bespoke Investment Group, companies beating their targets have seen shares rise an average 1.42% the next session, while those missing have fallen 3.72% (Source: Barrons Online).