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Stocks are still struggling despite earnings growth

By Lisa Singhania
The Associated Press

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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 think the first-quarter results are more than encouraging.

"These are very good earnings," said Howard Silverblatt, market-equity analyst for Standard & Poor's. "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.

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, 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.

A quieter stock market isn't necessarily a bad thing, says 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."

Week's market activity

For the week, the Dow ended the week down 247.27, or 2.4 percent, finishing at 10,225.57 after a decline of 46.70 yesterday.

Microsoft, one of the 30 Dow stocks, ended the week off $1.41, or 5.1 percent, at $26.13 a share, after yesterday's loss of 35 cents.

Boeing, also a Dow stock, added 24 cents, or 0.6 percent, for the week to end at $42.69, after declining 56 cents yesterday.

The S&P 500 index sank 33.30, or 2.9 percent, for the week to 1,107.30, after yesterday's loss of 6.59. The Nasdaq ended the week down 129.62, or 6.3 percent, at 1,920.15, after falling 38.63 yesterday. Gold/oil

For the week, gold slid $8.20, or 2.1 percent, to $387.50 an ounce, after adding 40 cents yesterday in U.S. trading.

Oil added 32 cents, or 0.9 percent, to $37.13 a barrel, after adding 7 cents yesterday in U.S. trading.