Investors are in a better mood lately, pushing stocks to new highs for the year. But the economy needs to show signs of strength for any turnaround to last

By Ben Steverman

The stock market is proving again that its movements don't always make sense. On July 23 the Dow Jones industrial average bounced back above 9,000 for the first time since January—on a day when Wall Street learned that more than 500,000 Americans filed for jobless claims last week.

Meanwhile, earnings reports show corporate profits falling by almost one-third, yet the stock market sits at its highest point this year. In the first two weeks of earnings season, in fact, the broad S&P 500 is up 11%.

That's not to say market observers can't cite explanations for the recent stock rally.

Second-quarter earnings are bad, but they're beating very low expectations. Before earnings season began, Thomson Reuters (TRI) said analysts were expecting second-quarter earnings for the S&P 500 to fall 35.6%. Now, updated based on early results, earnings should drop a mere 30.8%.

Companies such as 3M (MMM), which reported second-quarter results on July 23, are seeing profits and sales fall compared with last year. But they're beating first-quarter results, and they are raising estimates for profits in the second half of the year.

Americans continue to lose their jobs at an alarming rate. But the pace is slowing. Initial jobless claims have averaged 546,000 per week in July, but that's down from 612,000 in June, 630,000 in April, and 657,000 in March, Action Economics notes.

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