Second half to test stock recovery thesis; S&P 500 jumps 15% in Q2

NEW YORK -- The stock market's biggest quarterly gain in more than 10 years was fueled by hopes that the shrinking economy would start growing again in the later stages of 2009.

Starting Wednesday, that widely publicized second-half recovery thesis will be put to the test — and with it the fate of the nearly 4-month-old bull market.

To be blunt, it is show-me time on Wall Street.

If the bet pans out and the fledgling recovery picks up steam, investor confidence should get a boost and stocks are likely to break out from their recent stall pattern and start climbing again.

The risk is if the business resurgence never materializes, forcing investors to rethink their strategy, a psychological shift that could create a stock pullback.

Unfortunately, when the 18-month-old recession ends and how robust the recovery will be when growth does resume are still big unknowns. As a result, investor anxiety is expected to remain high until concrete signs of a rebound emerge.

"Sure, it's great that we had a fantastic second quarter, but we've got plenty of hurdles to overcome," says Richard Yamarone, chief economist at Argus Research, referring to the 15.2% second-quarter gain in the Standard & Poor's 500, its best showing since the fourth quarter of 1998. Even so, the S&P is up just 1.8% for 2009.

One hurdle, Yamarone says, is small businesses' inability to get loans or quick access to government stimulus money, which he says will result in "wider job losses and delay the economic recovery."

David Tice of the Prudent Bear fund says consumers have been damaged so badly because of declining home prices, the stock market slump and weak job market, that it is unlikely they will be able to power the economy and corporate profits like they did before the credit bust. "Our whole consumer model has been broken," he says.

The bullish thesis is well-known. Optimists believe the stock market low hit on March 9 marked the end of the bear market.