And after a dismal third quarter, where profit from operations declined by an annual 3 per cent, earnings are expected to grow as much as 5 per cent for the final quarter. "Earnings actually reaccelerated in the fourth quarter," said Louis Navellier, of Navellier & Associates. "It looks awfully good [for stocks this year]".
The Dow average rose 2.6 per cent last week, its first gain in three weeks, while the S&P's 500 gained 4.4 per cent. The Nasdaq soared 7.1 per cent.
Earnings from computer-related companies in particular have bolstered the outlook for stocks. Those reporting unexpectedly strong profit included Intel, Broadcom, maker of cable-modem chips and America Online. "Technology is continuing to tear the world apart," said Art Bonnel, fund manager with the Bonnel Growth Fund. "Profit margins are high, and it's an area you have to be in."
Companies with good news easily outpaced the 20 per cent whose earnings lagged estimates. "The assumption was that fourth-quarter earnings would be weak, but we are seeing growth," said David Mead, at Harris Bank in Chicago. "Analysts had knocked them down too much."
Because forecasts had been reduced so much some investors said they weren't impressed that companies are beating estimates. "Expectations were brought down and this gives them room to surprise," said Tim Ghriskey, manager at Dreyfus.
The booming economy is boosting earnings and stock prices, even for older industrial companies. Both General Motors and Ford reported better than expected earnings.
Growth surged 5.6 per cent in the fourth quarter, above the 4.5 per cent forecast - the highest rate in more than two years.
The caveat for US investors is the effect of Brazil's weakening finances on corporate profits. Brazil's plunging currency and rising interest rates reduce the prospects for a recovery in Latin America's largest economy. In a troubling sign, 78 S&P 500 companies issued profit warnings for the fourth quarter, a 47 per cent increase over profit warnings in the third quarter.