After posting solid gains in September, U.S. stocks are once again near all-time highs. But a significant hurdle in the form of monthly payroll data must be cleared next week if the advance is going to carry over to the fourth quarter.

At Friday's closing bell, all three major U.S. stock indexes had booked strong gains for September. The Dow Jones industrial average climbed 4.0 percent for the month, while the Standard & Poor's 500 Index advanced 3.6 percent and the Nasdaq Composite Index rose 4.1 percent. It was the best September for the S&P since 1998.

On Friday, the September payroll data is due. In a Reuters poll of economists, the median forecast has 94,000 jobs being added to non-farm payrolls, and the jobless rate rising to 4.7 percent from 4.6 percent.

In contrast, August non-farm payrolls shrank by 4,000 jobs, a surprise that undoubtedly persuaded the Fed to cut interest rates by one-half percentage point on September 18.

The payroll report is the major thing that a lot of investors are going to focus on, particularly since the August number was so far below expectations, said Brandon Thomas, chief investment officer of Portfolio Management Consultants, a unit of Envestnet Asset Management, in Chicago.

Thomas noted that recent declines in weekly jobless claims may be signaling a healthy jobs report for September. He expects 115,000 new jobs and a jobless rate unchanged at 4.6 percent.

If the numbers are too strong, the Fed may take a 'wait-and-see' attitude, Thomas said. That would disappoint those hoping for another rate cut at the October 30-31 policy meeting.

MOOD SEEMS IMPROVED

For the week, the Dow average gained 0.6 percent, the broad S&P 500 rose 0.1 percent, and the Nasdaq climbed 1.1 percent.

The stock market's strong showing in September helped it recover from the downturn in July and August, which was driven by turmoil related to weakness in the housing sector and rising defaults on risky subprime mortgages.

For the third quarter, the Dow gained 3.6 percent, the S&P 500 added 1.6 percent and the Nasdaq rose 3.8 percent.

September's gains came mostly after the Fed's rate cut. Consequently, the stock market psychology seems to have improved despite a struggling housing sector and lingering concerns about borrowers having trouble finding willing lenders.

For the year to date, the Dow is up 11.5 percent, while the S&P 500 is up 7.7 percent and the Nasdaq is up 11.9 percent.

The mood I feel is that stocks are modestly valued and there is much more on the upside, said Donald Gimbel, senior managing director with Carret and Co. LLC, which is based in New York. Although there might be a little bump in October, the fourth quarter is going to be quite good and the market should be at all-time highs at the end of the year.

While the key to interpreting coming economic data is whether it points to a mild pullback or a severe downturn, Gimbel believes the economy has swallowed the downturn in housing very well.

The week's economic data includes a pair of reports on the economy from the Institute for Supply Management. The median forecast for the ISM's index of U.S. manufacturing activity is 52.6, down from 52.9 in August, according to economists polled by Reuters. That report is due to be released on Monday.

The ISM report on the service sector of the economy is scheduled for Wednesday. The median forecast is for 55.0 in September, down from 55.8 in August, the Reuters poll showed.

Other economic data in the week will include U.S. car and truck sales for September and pending home sales for August, which will be released on Tuesday, followed by Thursday's reports on August factory orders and revised figures on durable goods orders.

DRUGS, WINE AND THE BOTTOM LINE

Quarterly earnings reports will be few in number, with drugstore chain Walgreen Co due to report results on Monday and wine maker Constellation Brands Inc scheduled for Thursday.

Other earnings reports due in the week include Pepsi Bottling Group Inc and Marriott International Inc.

Earnings season shifts into higher gear the following week.

Even if year-over-year earnings gains tend to be in the low single digits, Art Nunes, portfolio manager and strategist for Portland, Oregon-based IMS Capital Management, said the important thing is that the earnings continue to exceed analysts' estimates.

Nunes said that while housing and lending are doing badly and the consumer is slowing down, shortfalls in those areas will be more than made up by capital spending by the government and by corporate America.

S&P Unemployment U.S.