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Earnings look good,
but companies are beating
lowered expectationsNEW YORK >> Wall Street rallied this past week on a wave of encouraging earnings that sent stocks to their highest levels in months, raising hopes of a longer-term recovery now that the war with Iraq is over.
Indeed, even as stocks retreated Thursday and yesterday, many analysts said investors remained upbeat. Still, they caution that investors may be overoptimistic as companies beat lowered expectations and are largely guarded about their forecasts for the rest of the year.
"There is a wide gap between economists' top-down and businesses' bottoms-up outlooks," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The economic baton won't pass from consumers to businesses as long as a jobless recovery continues."
He said businesses are unlikely to commit to more capital spending until they see increased consumer demand for their products, and that might not happen given the weak labor market.
If so, "the first-quarter momentum for earnings can't continue," Sohn said.
The Nasdaq composite and Standard & Poor's 500 index posted a winning week yesterday on the strength of a two-day rally that lifted the Nasdaq to a near five-month high and the S&P 500 to its highest level in three months. The Dow Jones industrials dipped lower for the week, however.
Much of the week's gains came on earnings that beat lowered estimates due to the war with Iraq. The advance mostly fizzled after a downbeat report Thursday on jobless claims. Investors yesterday shrugged off somewhat encouraging data on the gross domestic product and housing sales.
In addition, companies such as American International Group and Sprint issued discouraging outlooks. AIG said that severe acute respiratory syndrome was curbing insurance sales in Asia, stirring fears about SARS' global economic impact. Sprint worried about the still-sluggish economy.
"Corporate managers are a little less likely to stick their necks out and make forecasts for future periods," said John Caldwell, chief equity strategist for McDonald Financial Group, part of Cleveland-based KeyCorp.
"While we're looking for better growth, the market tends to get ahead of itself sometimes, and maybe we're seeing too much optimism building in investors' eyes," he said.
Still, investors didn't appear to be particularly concerned even while cashing in for profits on yesterday. Analysts described much of the selling as a natural consolidation after a big rally and said investors remained poised for major buying on evidence of an improving economy.
Tracy Herrick, chief investment strategist at Jefferies & Co., attributed the optimism in part to declining oil prices, which briefly hit five-month lows this past week after the Organization of Petroleum Exporting Countries cut back less than expected on crude oil quotas.
"Oil prices are going to be the most important determinant in the coming six months because a drop would make profit expectations much stronger," he said.
Charles G. Crane, strategist for Victory SBSF Capital Management, added that stocks also appear to be the best bet compared with more-volatile bonds and money market funds, which pay yields of less than 1 percent.
"The stock market probably did find a bottom in the course of the last couple of months and will wind its way to higher levels," he said. "While stocks aren't cheap, neither are they excessively expensive."
He concluded: "Compared to the alternatives, they'll grab their share of investors' dollars."
For the week, the Dow fell 31.30, or 0.4 percent. It closed yesterday at 8,306.35.
The Nasdaq had a weekly gain of 9.04, or 0.6 percent, closing at 1,434.54 yesterday.
For the week, the Standard & Poor's 500 index rose 5.23, or 0.6 percent, to finish at 898.81.
The Russell 2000 index, the barometer of smaller company stocks, had a weekly advance of 4.80, or 1.3 percent, closing at 388.50.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 8,525.89, up 59.06 from the previous week. A year ago, the index was at 10,208.26.
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