NEW YORK — Wall Street's renewed infatuation with stocks turned squeamish last week.
It was as if the movers and shakers of high finance suddenly saw what the cat had dragged in: the likelihood of another interest rate hike when Federal Reserve policymakers meet May 20.
Strong first-quarter earnings led the Dow Jones industrial average to its biggest one-day point gain since Dec. 23, 1991.
But the Tuesday surge was mostly overcome by losses later in the week.
A positive earnings surprise at IBM proved less influential than hints of higher interest rates, and the Dow ended the week with a small gain, at 6738.87.
The index dropped 53 points Friday after Fed governor Laurence Meyer said current economic growth without added inflation may be unsustainable.
That was talk.
This week a string of important economic reports will test the mettle of Wall Street's bulls:
* New home sales: Economists are forecasting a seasonally adjusted annual rate of 790,000 in March, down from 811,000 in February. Actual numbers will be announced Monday.
* Employment cost index: Regarded as a favorite of Fed chairman Alan Greenspan, this measures wages and fringe benefits. Reported Tuesday, it is expected to be up 3.1 percent from the first quarter of 1996 to the first quarter of 1997. The previous quarter it was up 2.9 percent.
* Gross domestic product: The Commerce Department Wednesday will take its first crack at estimating the growth in the nation's output of goods and services in the first quarter. The consensus of economists is that with a mild winter, real GDP grew at a 4 percent annual rate, a bit faster than the previous quarter's 3.8 percent.
* Personal income. Economists are forecasting a modest increase of 0.4 percent in March to be announced Thursday.
* Employment: Unemployment, economists say, will remain at 5.2 percent in March. The economy will add 175,000 jobs, also the same as in February, they predict for numbers out Friday.
"Investors are clearly skittish," says Rao Chalasani, chief investment strategist at Everen Securities Inc. in Chicago.
"There's absolutely nothing wrong with the [US] economy," Mr. Chalasani says. The problem "is that it is a little too strong." If the new data show signs of inflation, the Fed will almost certainly seek to head it off by boosting interest rates at least another quarter of a percentage point, he says.
In March the Fed raised rates for the first time in two years.
One market segment that continues to lag behind is small companies.
The Russell 2000 small company index is down more than 7 percent this year, even while the blue-chip Dow and Standard & Poor's 500 rose. The Dow is up 4.5 percent, the S&P 500 up 3.3 percent.
Rate hikes would likely hurt smaller companies, Chalasani says. Borrowing costs tend to be higher for them than for large, well-established firms.
Still, he says many small stocks, with prices pushed lower, are now attractive buys.
"Investors have been ignoring small cap stocks because they like the solidity of the big blue-chips, where you can get an international play," says Gene Jay Seagle, who heads Tactics & Technics in Weston, Conn.