NEW YORK, Sept 24 (AFP) - Wall Street's modest six-week rally appeared to stall over the past week, leaving analysts pondering whether the market is headed for a modest or even a steep correction in the coming weeks.
In the week to Friday, the Dow Jones Industrial Average tumbled 2.31 percent 10,047.24 while the Standard and Poor's 500 broad-market index sank 1.63 percent to 1,110.11.
The tech-heavy Nasdaq composite meanwhile dropped 1.60 percent for the week to close Friday at 1,879.48.
The markets gave an initially positive reaction to the Federal Reserve -- which boosted key rates Tuesday for the third time this year while offering an upbeat economic outlook -- but the effect wore off quickly as oil prices flirted with record highs.
"After six weeks when the stock market has been mostly up, it's the first week that stopped that trend quite sharply," said Art Hogan, market strategist at Jefferies and Co.
"The biggest concern is how much high energy prices will impact earnings in second half ... people will keep a wary eye on the price of oil, that will continue to be main thing."
The November contract for light sweet crude climbed 42 cents to 48.88 Friday in New York, eclipsing the prior all-time record close August 19 of 48.70 dollars and nearing the intraday record of 49.40 dollars on August 20.
Peter Boockvar, equity strategist at Miller Tabak and Co., said investors are fretting about what could be "one of the most difficult earning seasons that we've seen in more than a year."
"The market is concerned about earnings," Boockvar said, adding that commodities prices are weighing on the market because they impact corporate profits.
"With respect to profit margins, it's not just oil. It's beef, it's nickel, it's aluminum, it's copper, it's milk, it's cheese, it's a variety of commodities that are impacting markets," he said.
Meanwhile, Bob Dickey at RBC Dain Rauscher said the market appears to be entering a correction that could last through the end of the year and test recent lows.
"This is the statistical time of the year for a deeper correction," he said.
But Dickey said that at worst, the correction will end in December, allowing the markets to recover in January.
"We believe that this year will see one of the best 'January Effects' that we have seen in years, but there will still be one more move to the downside in a wave of tax-selling, in our opinion, before the rally begins."
Edgar Peters, chief investment officer at Pan Agora, says oil prices are only partly to blame for the slump and that the market appears to be concerned about the risk of a terrorist incident ahead of the presidential election in November.
"The market is building in an exceptionally large risk premium for some sort of catastrophic event possibly before the election because based on our models, earnings would have to drop 35 percent in order to justify current levels, which is worse than the Great Depression," he said.
Bonds rallied as the market highlighted doubts about the stregnth of the economic recovery and the pace of interest rate hikes, despite the Fed's upbeat tone.
The yield on the 10-year US Treasury bond fell to 4.031 percent from 4.127 percent a week earlier and that on the 30-year bond to 4.799 percent from 4.917 percent. Bond yields and prices move in opposite directions.
"The overall tone of the (Fed's) press statement leaves us with the view that the Fed is not 100 percent convinced that the economy is poised for a renewed take-off, but seems reasonably confident that the inflationbackdrop will remain benign," said David Rosenberg at Merrill Lynch.