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Even if all goes well,
stock prices face slow,
steady growth pace
NEW YORK » With first-quarter earnings roughly 23 percent higher than they were a year ago, you'd think Wall Street would be on fire.
Instead, stocks are struggling amid persistent worries about interest rates.
Analysts say the malaise reflects investors' lingering doubts about the future -- and the fact that earnings growth is likely to slow later in the year as companies start hiring and spending again.
"We see another 5 to 6 percent upside to stocks for the rest of the year," said Jeff Kleintop, PNC Advisor's chief investment strategist. He predicts the Standard & Poor's 500 index will end the year up 8 percent, around 1,200 -- a decent gain, but far from spectacular.
"The point is that profit margins are peaking ... and stocks are probably fairly valued," said Kleintop, who sees the market's behavior as part of a longer-term trend. "I think we're at the beginning of an era of more modest investment returns."
That said, he and other analysts believe the first-quarter results are more than encouraging.
"These are very good earnings," said Howard Silverblatt, market equity analyst for Standard & Poor's Inc. "We're seeing that sales have increased again and that the growth is across the market, not just concentrated in one sector."
Analysts say the overall momentum is encouraging, but the quarter-to-quarter comparisons will get tougher as 2004 advances and companies find themselves up against numbers from late 2003, when profits started to improve.
Silverblatt expects operating earnings to improve for the rest of the year, but the size of the increase will shrink. In the second quarter, he forecasts a 20 percent increase in earnings. For the third quarter, he predicts a 13 percent jump and for the fourth quarter, a 15 percent increase. For the entire year, he expects earnings to grow nearly 18 percent.
At the same time, companies are expected to start spending again -- hiring new employees and buying computers and equipment to deal with the improving business climate. Merger and acquisition activity is also expected to pick up as companies grow more confident of the economy and look for ways to use cash stockpiles that are at record levels.
All that spending will likely reduce corporate profits, but there is a bright side, according to analysts.
"Business investment drives growth and turns a short-term recovery into a long-term sustainable expansion," Ken McCarthy, chief economist at vFinance Investments Inc. wrote in a recent commentary. "When businesses are confident that the growth in demand that they are experiencing will continue, they are willing to invest in new equipment and software and also start hiring more workers."
Add that dubiousness to the specter of rising interest rates and anxiety over the war in Iraq and terrorism and you have a recipe for cautiousness -- and a greater likelihood that Wall Street will continue to limp, rather than zoom.
"Investors are content to sit on the sidelines and let some of the macro, geopolitical issues play out" before doing any significant buying," Kleintop, the PNC Advisors' strategist, said.
A quieter stock market isn't necessarily a bad thing, believes Silverblatt, who forecasts the S&P 500 index will end the year at 1,215.
"We've had a retrenchment for the last six weeks to two months, but stocks are still nicely off their lows and we believe the market will continue to move higher at a slower pace," he said. "This isn't the 30-40 percent increase that people got used to in the market in the late 1990s, but this is more steady and we believe is good for the economy and market."
Wall Street suffered through a trying week as interest rate angst prompted investors to shrug off just about every bit of good economic and earnings news. The Dow Jones industrials lost 247.27, or 2.4 percent, over the week, closing at 10,225.57. The Nasdaq composite index bore the brunt of the selling, falling 129.62, more than 6 percent, and closing at 1,920.15.
The S&P 500 lost 33.30, or nearly 3 percent, and finished at 1,107.30.
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