TORONTO - Stock markets could be set for a tepid trading week after an anemic finish last week that seemed to fly in the face of another series of positive earnings reports.

Well-received earnings reports from the likes of and Microsoft at the end of the week failed to lift the markets overall. And investors also looked past a sharp rise in U.S. home resales. There is increasing talk that, now that investors have received some reassurance about the third-quarter earnings season, it's getting harder to maintain the powerful rally that's been running along since early March.

"It looks like the bar is pretty high," said John Johnston, chief strategist, the Harbour Group at RBC Dominion Securities.

"The percentage of companies surprising on the upside is very significant, well above historic averages. You have 62 per cent of companies reporting so far in the U.S. that have beat their estimates on sales."

But with the S&P/TSX composite index up more than 50 per cent since early March and the S&P 500 up about 60 per cent, the rally is looking extended.

And the weak showing on stock markets last week in the absence of anything terribly negative indicates that investors have already priced in a lot of good news "and people are getting cautious and a bit nervous," said Johnston.

It's important to remember that the markets were pricing in another depression eight months ago.

Following that, investors "basically priced in the end of the recession in the middle of the year - which we've got," observed Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.

"And they priced in much better growth in the second half which I think we're getting."

And now that some of the momentum of the past eight months is starting to fade, investors are wondering what's going to happen early next year.

"Is growth going to be there, the same as now?" asked Pyle.

"If not, and if I don't think I'm going to get topline performance from these companies, to continue this nice earnings surprise parade that we have had, then stocks should soften. And potentially I think we're into that right now."

A wild card in looking at growth prospects is the U.S. dollar, which has weakened considerably this year in the wake of massive stimulus borrowing needed to soften the blows of the worst recession since the 1930s. That also helped send commodity prices higher, along with the Canadian currency.

Oil hit a one-year high above US$80 last week, even as the TSX energy sector lost ground. This problematic because crude is "getting into the territory that one has to be worried because it's like a tax," said Johnston.

"In many ways, it's going to be self-defeating, you see signs that consumers are weakening, and oil prices will pull back. And there is a lot of inventory out there still."

A bigger problem is the Canadian dollar, which lost some ground last week after Bank of Canada governor Mark Carney said the sharply higher currency is putting a brake on the country's economy recovery.

Carney made it clear that "intervention is always an option" to control the rise of the loonie, which came within about 2.5 cents of regaining parity with the U.S. dollar a week ago.

And it's not just Canada that is feeling the currency pain.

"At some point, every country in the world is going to get unnerved by a relentless decline of the U.S. dollar going into next year. The Bank of Canada cannot be the only central bank in the world that is feeling this way," said Pyle.

"The major central banks of the world are looking at this and thinking, if this doesn't get arrested soon, and we're talking about another 10 or 20 per cent or more fall in the U.S. dollar against all major currencies, all of a sudden whatever recovery we happened to have is gone."`