This 1 Thing Will Make or Break the Stock Market Rally

The stock market continued its upward momentum on Monday, following through on a solid start to April last week with further gains. Both the S&P 500 (^GSPC 1.20%) and the Dow Jones Industrial Average (^DJI 0.69%) hit new records. The Nasdaq Composite (^IXIC 1.59%) was still clawing back the ground it had lost earlier this year, but its advance was the largest of the three major indexes.

Data source: Yahoo! Finance.

Investors have been extremely optimistic about the prospects for a full economic recovery after 2020's coronavirus-plagued recession. Yet even as economic data starts to support the likelihood of a rebound, there's one thing that looms large on the horizon for investors.

In the next couple of weeks, earnings season will give investors their first real read on how things are going in 2021. Although no one expects those results to reflect a full recovery, they nevertheless will set the tone and decide whether investors have gotten ahead of themselves. What key businesses report could determine whether the stock market will keep rising from here.

All eyes will be on big banks

The first set of companies that will get attention for their first-quarter 2021 results will be major financial institutions. JPMorgan Chase (JPM 1.44%), Wells Fargo (WFC -0.26%), and Goldman Sachs (GS 1.59%) are expected to report on April 14. Bank of America (BAC 1.70%), Citigroup (C 2.82%), and U.S. Bancorp (USB -0.20%) will follow on April 15.

Investors are generally upbeat about big banks being able to mount a full recovery from the first quarter of 2020, which included massive loss provisions related to the pandemic. For instance, JPMorgan's earnings could more than triple from year-ago levels. Goldman and Citigroup will likely see earnings double, and substantial gains are likely for the other banks as well.

Image source: Getty Images.

More importantly, investors will get a sense of how much major banks intend to return to their shareholders through dividends and stock buybacks. Those efforts have been ongoing since the financial crisis, but they were put on pause because of the financial stresses of the pandemic. If the news from Wall Street's finest proves favorable, then it could spur a further rally in financial stocks that could lead the whole market higher. If they disappoint, though, the banks could be the catalyst for a stock market pullback.

A look at industrial America

The other key area will be the industrial sector. Alcoa (AA -0.80%) will report on April 15, while Delta Air Lines (DAL 0.43%) leads off the airlines on the same day. Most of Delta's rivals will report the following week.

Alcoa has already seen an uptick in interest from investors as demand for aluminum has been on the rise. After years of supply imbalances related to Chinese production and consumption of the lightweight metal, market watchers are increasingly optimistic that aluminum could be an even more important commodity than copper in the economic recovery worldwide. Alcoa's emphasis is purely on commoditized aluminum, so it stands to benefit from continued rebounds in use of the metal for electric vehicles, aerospace, and other weight-sensitive industries.

Delta's business is one of those areas, and investors expect more bad news from the airline for the first quarter. What shareholders will want to see, though, are signs of more passengers returning to the skies. Deliver that, and Delta could see its stock continue to rise. If the outlook is cloudy, however, it could prove problematic for Delta and its peers.

Stay tuned

Earnings season is about to start, and smart investors will be paying attention. What key companies like big banks, airlines, and industrial giants say could determine the course of the stock market for the rest of 2021 and beyond.