The Last Week in Review:

The situation in the Middle East appears to be significant enough to keep investors cautious near-term. The economy is slowing down. Earnings growth is slowing down. Inflation is even picking up a bit. Though it might therefore seem odd to that the fundamentals are improving, but they are on the basis that the worst of these issues is already priced into the stock market.

Economic growth is clearly slowing down. There is no question about that. But it is not yet obvious that a recession is in the cards. Real GDP growth could slow to 2% in the second half of the year. That would be the slowest growth since 2002 and the type of moderation that the Fed has been seeking, and needs, to curtail the modest increase in inflation.

The S&P 500 has been flat for six months. During the same period, earnings have been up at an over a 20% annual rate. That means the price/earnings multiple has dropped 12% during the same time. The P/E on operating earnings for the S&P 500 now is at just 15.3. For the current level of interest rates, that is very reasonable valuation. The decline in the P/E ratio this year reflects the fact that the market has already incorporated the bad news noted above.

The major averages lost ground again for the week as the Dow lost 351 points shrinking its year-to-date gain to 0.2%. The S&P dropped 29 points and now has a year-to-date loss of 1%. The NASDAQ followed suit by shedding 92 points increasing yearly losses to 7.6%. The Russell gave back 28 points and lowered its year-to-date gain to just 1.2%.

The Week Ahead

Earnings Season begins in earnest this week as Citigroup (C) and Charles Schwab (SCHW) report results on Monday. Tuesday morning Coca-Cola (KO), Johnson & Johnson (JNJ) and Merrill Lynch (MER) release earnings along with IBM (IBM) and Yahoo (YHOO). On Wednesday Abbott Labs (ABT), JP Morgan (JPM), Pfizer (PFE), Apple Computer (AAPL), Intel (INTC), Motorola (MOT), QLogic (QLGC), Qualcomm (QCOM) all will announce results. Thursday, Ford Motor (F), Google (GOOG) and Microsoft (MSFT) post results. On Friday 3M (MMM), Caterpillar (CAT) and Eli Lilly (LLY) will report profits.

Options expire this week which could add significant volatility to the market. According to Reuters Estimates, S&P 500 companies' earnings are forecasted to rise 10 percent for the quarter, which would be the 16th consecutive quarter of double-digit profit growth.

Key economic reports released this week include the July NY Empire State Index along with June Industrial Production and Capacity Utilization on Monday. On Tuesday, June PPI numbers will be announced along with May Net Foreign Purchases. Wednesday the June CPI numbers will be reported as well as June Housing Starts and Building Permits. Fed Chief Bernanke will give a semi-annual policy report to Congress on Wednesday as well. On Thursday the Weekly Jobless Claims will be reported followed by June Leading Indicators, July Philadelphia Fed Index, and the closely watched release of the minutes from the FOMC's last meeting will happen later that day.

In Summary: Investors need to focus on the coporate earnings being released this week and wait and see how the market reacts to them.