This was not supposed to be such a good moment for the stock market.
Corporate earnings still are expected to look weaker this year, and fears of a meltdown in the subprime lending market have loomed. The dollar has been eroding against major currencies, and the overall outlook for the U.S. economy has been hazy.
But as spring has sprung, everything on Wall Street has unexpectedly come up roses.
The Dow Jones industrial average broke a record for the third day in a row Friday, with the benchmark index hurtling ahead 153.35 points, or 1.2 percent, to 12,961.98.
It was the seventh winning day in a row and a nearly 350-point gain for the week, putting the index within striking distance of the psychologically significant 13,000-point barrier earlier in the year than even optimists had anticipated.
Of course, markets can reverse course quickly, and analysts already were looking ahead to the possibility of a correction next week, but what was striking on Friday was how strong the fundamentals look, particularly for American corporations.
“We have had very good readings on both employment and spending in the U.S.,” said Carl Tannenbaum, chief economist at LaSalle Bank. “Foreign economies are outperforming expectations and improving sales of U.S. products overseas. Those trends are flowing to corporate bottom lines. Our forecast is this is going to be a very good year.”
Among the blue-chips reporting first-quarter earnings this week, 10 of 16 Dow components posted financial results that surpassed analyst forecasts, The Associated Press said.
Those better-than-expected operating results, plus a general decline in shares outstanding, spurred analysts to boost estimates for first-quarter earnings-per-share growth at S&P 500 companies to 6.2 percent from last week’s 3.1 percent, according to Bloomberg data.
One of those surprise companies pushing the Dow higher Friday was Caterpillar Inc., the Peoria-based equipment giant, which closed up $3.20, at $71.82. The company said “exceptional growth” in foreign markets helped offset weak results in key U.S. sectors.
“Earnings have come through as expected or better than expected,” Peter Brodie, director of investments at Bryn Mawr Trust Co., said about the stock market in general.
At the close of trading Friday, virtually every sector of the American stock market was up. The S&P 500 was up 13.62, to close at 1484.35, up 4.66 percent for the year, and Nasdaq rose 21.04, to close at 2526.39, up 4.6 percent for the year.
Of the 47 market subsectors followed by Bloomberg, ranging from oil service companies to middle-size companies to the entire New York Stock Exchange, not one ended lower Friday.
“It’s not a matter of 13,000 for the Dow; we could be looking at 14,000 by the end of the year,” Robert Froehlich, chief investment strategist for investment firm DWS Scudder, told the AP. “There’s too much money out there chasing too few companies. This story isn’t ending anytime soon.”
Certainly, that highly optimistic prediction wasn’t held by all market observers.
“If there was a correction next week, we wouldn’t be surprised,” said Brodie, though adding that the wise investor will ignore such ups and downs and allocate assets according to a plan.
Still, there was plenty to reassure investors.
For weeks there has been concern that the rising default rate on subprime mortgages would infect financial markets. Subprime mortgages are loans made to home buyers with questionable credit and ability to repay the money.
“The real concern was that it was going to spread into other areas of credit,” said Michael Church, portfolio manager of Church Capital Management. “That hasn’t happened yet.”
Church said a credit scare still could hurt small companies with big holdings of subprime mortgages, but won’t much hurt big, diversified financial houses.
Stanley Nabi, who helps oversee about $8 billion at Silvercrest Asset Management in New York, told Bloomberg that “pessimism over the outlook for earnings is beginning to ease as you see profits from companies like Caterpillar growing.”
As for the future, “The market should rally further,” Nabi said.
———-
rmanor@tribune.com
