By Nick Godt

With any concerns about the second-quarter earnings season mostly behind, the market will now key on more signs of "green shoots" in big economic reports, starting with the second-quarter GDP on Friday.

"The recent batch of earnings releases has certainly nourished those green-shoot hopes," says Ken Tower, chief market strategist at Quantitative Analysis Service.

In fact, part of those bright hopes were already being factored in the market on Thursday, he said, noting stocks' latest leap to fresh highs for the year.

On Thursday, the Dow Jones Industrial Average (DJI) gained 83 points, or 1%, to end at 9,154, its highest close since early November. The broad S&P 500 index (SPX) was up 11 points, or 1.2%, at 986, also its highest since early November. The Nasdaq Composite (RIXF) rose 16 points, or 1.2%, to 1,984, after earlier topping the 2,000 mark for the first time since early October.

"Today is the anticipation of the improvement that we're likely to get in tomorrow's data," Tower said.

Stocks have already rallied 40% since hitting lows in March on hopes that the worst of the recession is behind. But evidence of economic improvement has remained anecdotal.

Yet, Friday's report on second-quarter gross domestic production is widely expected to confirm that the economy is falling at a much slower pace. The GDP is expected to show the rate of contraction slowed to 1.2% in the second quarter, compared with a 5.5% slide in the first quarter, according to the average forecast of economists surveyed by MarketWatch.

"We're up sharply today, so it would not be surprising if we see some profit-taking tomorrow," Tower said. "The market is already anticipating an improvement, so we could even decline as the news comes out. But over the longer-term, this should put us in good shape."

Economically sensitive sectors -- such as industrials, energy, materials, technology and consumer discretionary -- should stand to gain the most. But Tower noted that the energy and industrials sectors have already rallied on optimistic outlooks.

According to economists at BMO Capital Markets, who suggest that the third quarter might also mark the end of the recession, there are also signs that auto production is "ramping higher" and that the housing market is starting to stabilize.

Also in anticipation of this, the consumer discretionary sector, which includes not only retailers -- such as Macy's Inc. (M) and Best Buy Co Inc. (BBY) -- but also automotive-related stocks such as Ford Motor Co. (F), Goodyear Tire & Rubber (GT), and homebuilders -- such as KB Home (KBH) and Lennar Corp. (LEN) -- has already rallied quite strongly in July.

The sector is already up 16% for July, making it the third best performer on the S&P 500.

The move took place "even though there's a lot of concern for debt levels for consumers," said Sam Stovall, chief investment strategist at Standard & Poor's.

He said there are concerns that may economic sensitive sectors may have already rallied in anticipation of an earnings and economic recovery. Stovall therefore recently surveyed S&P analysts to figure out which sub-sectors have been laggards since stocks began bouncing back in early July after slumping for several weeks.

He then selected among those stocks that are rated buy or stronger by S&P. Among those are the biotechnology sector, and stocks such as Gilead Sciences (GILD). Among brewers, S&P suggests Molson Coors (TAP.NV.T); among household products, Colgate-Palmolive (CL); among soft drinks, Coca Cola (KO), and in systems software, Sybase (SY).

For the forward-looking animal that is the stock market, much of the interest from the GDP report will come from what it means for the economy going forward. Many economists so far are increasingly positive about the second half of the year.

"The second quarter of 2009 may likely prove to be the final period of contraction of this recession," said Jerry Webman, chief economist at Oppenheimer Funds, in a note.

"As we move into the second half of the year, several key components of GDP, including inventories, business investment and housing, are likely to revert from extremely negative levels to neutral or slightly expansionary states," he said.

On Wednesday, stocks took a hit after the Commerce Department reported a much worse than expected 2.5% drop in orders for big-ticket items, largely due to the woes of the auto industry as well as slumping orders for aircraft.

But excluding those sectors, "the June data otherwise revealed a pattern of upside surprises for orders ex-transportation, shipments and capital equipment, alongside as-expected inventory data," Mike Englund, an economist at Action Economics, wrote in a note.

The equipment and software components of the GDP, he said, should also show there was a slower rate of deceleration last quarter.