By Kate Gibson

The U.S. stock market is keeping close tabs this week on financial results from Macy's Inc. and other major retailers, the last large group to report quarterly earnings, with a recent rally in the sector raising expectations.

"The recent price action of many large retailers suggests expectations for good news from these companies is high, thus any slight disappointment could translate into a quick pullback in these names, which spills more broadly across the market," Fred Dickson, chief market strategist at Davidson Co., wrote to clients Wednesday.

"Generally speaking, the discretionary sector wouldn't have much impact from a mathematical standpoint; it's much smaller than say tech or energy," said Dan Greenhaus, recently named chief economic strategist at Miller Tabak.

But given the current focus on consumer-spending patterns, earnings reports from retailers "could have outsized effects on the market more broadly," the analyst added.

On Wednesday, consumer-discretionary shares, which account for 9.3% of the S&P 500 Index's (SPX) market capitalization, were among those advancing as the major indexes rallied more than 1%.

"There are signs that sales are stabilizing, but the back-to-school season will be weak, [with] demand likely to be among the worst in years," said Nick Kalivas, equity analyst at MF Global Research. "Back-to-school spending is a predictor of holiday spending."

Retail stocks on Wednesday were bolstered as department-store operator Macy's raised its profit outlook for the year. .

"Attention should be paid to the likes of Macy's and Ethan Allen Interiors Inc. (ETH), among others, to see if any progress is expected with respect to consumer behavior," according to Greenhaus. .

"The retailers have had a near-40% rally off the lows, and these reports could be the fuel to drive stocks higher or pull them back," he said.

But the market's advance fell back from session highs after the Federal Reserve said it would curb the pace of its program to purchase U.S. debt as the recession abates. .

"Bernanke is showing a steady hand on the tiller here. There were no surprises in the [Fed] announcement and you have to assume the Fed is pleased with the economy's progress thus far and don't want to make the mistake of even hinting at tightening too soon," said Howard Ward, chief investment officer, Gabelli Asset Management Co.

"We're going to muddle through this, Armageddon is off the table," Ward added.

After a 175-point climb, the Dow Jones Industrial Average (DJI) scaled back to finish at 9,361.61, up 120.16 points, or 1.3%. The S&P 500 gained 11.46 points, or 1.2%, to 1,005.81, while the Nasdaq Composite Index (RIXF) rose 28.99 points, or 1.5%, to 1,998.72.

Retail nation

"We will get a better picture of the health of the nation's retailers as several big ones report second-quarter earnings, including Wal-Mart Stores Inc. , Kohl's Corp. and Nordstrom Inc. ," said Jacob Meyer, an equity analyst at D.A. Davidson & Co.

"We expect to see these retailers meet or beat analysts' earnings estimates as a result of cost-cutting," he added.

Wal-Mart, part of the Dow industrials, early on Thursday will report financial results for the second quarter ended July 31.

Kohl's and Nordstrom are also slated to report Thursday, while results from J.C. Penney and Abercrombie & Fitch Co. (ANF) are on tap Friday.

Related numbers are also due Thursday from the government, which is expected to report retail sales in July gained 0.7%. Excluding auto sales, economists are looking for monthly sales to stand little changed to slightly higher.

But the report could prove better than anticipated, given the recent rise in the federal minimum wage, said Margaret Kempner, a foreign-exchange analyst at Brown Brothers Harriman & Co.