A growing economy with little pickup in inflation means a great environment for business. Smaller US companies should do relatively better than their larger brethren as the smaller companies do little export business and thus aren't hurt by the strong dollar.
"We continue to be in an ideal environment for small company stocks," said J Gary Craven, of small-stock investing at Evergreen Keystone Investments. "We have plenty of opportunities for companies to provide products and services which should be very profitable - and that leads to a strong earnings growth outlook."
Industry analysts forecast that third-quarter earnings for the companies in the S&P 500 will rise 12.2 per cent from last year.
Last week, the S&P 500 gained 0.5 per cent to a record 960.46. The Dow Jones Index rose 1.5 per cent, to 8038.58, still below its 6 August record of 8259.31.
WorldCom Inc's bid for MCI Communications prompted a round of takeover speculation in telecommunications stocks. Teleport Communications Group jumped 8 per cent, even after losing 2 points on Friday.
This week's earnings calendar includes electronics company Motorola and Aluminum Co of America, one of the 30 stocks in the Dow Jones Industrial Average, both on Monday; drugmaker Abbott Laboratories on Thursday and car manufacturer Chrysler Corp on Friday.
"We're enthusiastic about the financial stocks, particularly with interest rates coming down and the good employment report," said Thomas A Kolefas, manager at Loomis, Sayles & Co. Kolefas owns shares in Chase Manhattan, BankAmerica, Fleet Financial Group and Bank of New York.
Some investors, taking a longer view, worry that if the economy is steady, the double-digit earnings growth won't last. "If the economy does lighten up I don't see how you can expect earnings to accelerate," said Mike Hamilton, at Invista Capital Management in Des Moines, Iowa.
Mr Hamilton likes McLeod USA Inc, a local telephone company, and 3Com Corp, which makes products that link computers in networks.
Many investors caution that with the Standard & Poor's 500 Index up 30 per cent this year, stocks already reflect the glowing outlook, so prices may not rise much further from here. Still, with inflation benign and interest rates falling, neither are stocks likely to tumble any time soon.
Copyright: IOS & BloombergReuse content