Upbeat earnings continue to outweigh mixed economic data and Europe concerns

Stocks moved higher as good earnings reports prevailed over investors' persistent worries about the European debt crisis, as well as some data suggesting a slowdown in the U.S. economic recovery. Markets started the week on a down note in reaction to a steep drop in European stocks, apparently prompted by the dissolution of the Dutch government over the weekend in response to dissatisfaction with austerity measures. Investors also seemed concerned about the strong showing of French socialist candidate François Hollande in the first round of the country's presidential voting. Some worry that Hollande will not cooperate with German Chancellor Angela Merkel in pushing through fiscal consolidation in the eurozone.

U.S. stocks regained their footing as the week progressed, thanks in large part to first-quarter earnings that have generally exceeded analysts' expectations-roughly three-fourths of the S&P 500 companies that have reported so far have topped estimates, according to Thomson Reuters. Strong showings in the technology sector provided a particular boost to the Nasdaq Composite Index.

The economic backdrop for corporate profits was mixed, however. Weekly jobless claims remained somewhat elevated for the second week in a row, suggesting that the sharp drop in claims earlier in the year may be ending. On Friday, the government announced that the U.S. economy had grown at an annual rate of 2.2% in the first quarter of 2012 versus 3.0% in the fourth quarter of 2011. The headline number masked stronger underlying data, however, according to our economists. "Core" growth measures, such as consumer spending and housing construction, enjoyed solid growth, while government spending fell sharply. Continued job and income growth remain critical for a self-sustained recovery, particularly given the headwind of fiscal policy uncertainty beyond 2012.