Star-Bulletin news services
Investors getting too
carried away about
earnings, analysts cautionThe speed of growth may slow
next year as the recovery shifts
into expansion
NEW YORK >> Wall Street welcomed another batch of better-than-expected profits this past week, helping carry the major indexes to fresh 52-week highs. While analysts expect moderate gains ahead, the third-quarter earnings season might represent a peak.
With nearly one-third of the Standard & Poor's 500 companies reporting so far, 90 percent have met or beat analysts' estimates, according to Thomson First Call. S&P 500 earnings are expected to rise nearly 20 percent from last year; that figure is up from the initial estimate of 15.7 percent just two weeks ago.
"The economic recovery has arrived and turned out to be much healthier and stronger than advertised," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "But 2004 won't be as rosy as 2003."
He said that some of the unexpectedly strong earnings could be attributed to the dollar's depreciation as well as this year's tax cuts. But those effects could be more tempered in coming quarters, while the risk of rising interest rates continues to grow.
"It's possible the market's expectations have run ahead of economic fundamentals," Sohn said.
The three main gauges posted new highs this past week, with the Nasdaq composite notching its best performance in 21 months and the Dow Jones industrials and S&P 500 reaching levels not seen in nearly 17 months.
Most of the gains came early in the week on better-than-expected results from Motorola Corp. on Monday and Johnson & Johnson on Tuesday. Then the markets lurched up and down the remainder of the week, leaving the main gauges mixed for the week.
Analysts said the strength in third-quarter profits was not entirely surprising. Companies were overly cautious about their outlooks earlier in the year after setting estimates too high during the three-year bear market.
Fourth-quarter earnings should be similarly strong, with profits projected to rise 22.2 percent, in part because of an easy comparison with the same period last year, when companies were still struggling in a weak economy.
Next year has other factors in its favor, including a presidential election season that tends to keep taxes and interest rates low.
But the speed of growth should slow as the economy shifts from recovery into expansion. Analysts also are in danger of becoming overly optimistic as they bet on the third-quarter's performance to continue into 2004.
"The biggest fear at this point is that analysts tend to work on current information and extrapolate it out," said Joe Cooper, research analyst at Thomson First Call. "If we get in period of dramatic pickup, that can't last forever."
Meanwhile, investors expectations may have become too high. There was evidence of that in the latter half of the week, when investors sold despite largely encouraging earnings from companies such as Intel Corp. and General Motors Corp.
"The coin phrase out there is the market is priced to perfection," Cooper said. "Stocks may need to sit and move sideways for the next couple of quarters to ... justify the levels where they are."
The Dow ended the week up 47.11, or 0.5 percent, finishing at 9,721.79. For the week, S&P rose 1.26, or 0.1 percent, to 1,039.32.
The Nasdaq lost 2.95, or 0.2 percent, in the week, closing yesterday at 1,912.36.
The Russell 2000 index, the barometer of smaller company stocks, ended the week up 1.30, or 0.3 percent, closing at 520.36.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 10,098.38, up 13.06 from the previous week.
A year ago, the index was at 8,323.78.
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