New York market: Investors encouraged by earnings growth

Dow Jones

EXPECTATIONS for the fastest earnings growth in four years could boost US stocks after a mild jobs report eased concern that interest rates will head higher.

First Call Corp expects 20.9 per cent profit growth from companies in the S&P 500 index. "At the end of the day, we have a very positive earnings engine, and that's going to provide significant upside to the market," said Uri Landesman at Aaron Fleck & Associates. "I now feel there's more than a 60 per cent chance of no rate tightening for the rest of the year."

Last week, the S&P 500 rose 0.7 per cent and the Dow Jones Industrial Average fell 0.1 per cent. The Nasdaq rose 3.1 per cent. From Memorial Day until Labor Day - the traditional US summer - the Nasdaq soared 15 per cent. The S&P 500 added 4.4 per cent and the Dow gained 5.1 per cent.

Stocks soared on Friday after a Labor Department report showed the economy had created fewer jobs than expected in August, even as wages rose less than forecast. The S&P had its biggest gain of the year.

Financial companies may gain because stable or falling rates generate greater demand for financing, while raising the value of the bonds in the firms' portfolios. J. Morgan and American Express led the Dow's advance on Friday.

"The banking group looks particularly interesting because it's been selling off dramatically with the perception that higher interest rates are going to undermine profits," said Ned Riley, chief investment officer at BankBoston. If long-term interest rates decrease later this year, as Mr Riley expects, "this group will be one of the first ones out of the chute."

Although Friday's report pushed stocks and bonds higher, many people remain wary of the Federal Reserve. Central bankers will scrutinise reports in coming weeks on retail sales, consumer prices and GDP for signs that the economy is overheating. "If we continue to see good numbers for growth and output, that's good for earnings and good for stocks," said one analyst. If the numbers are too strong, though, "the Fed is likely to lean against the wind and raise rates."

William Rubin, at Keefe Managers, said that if the data shows rapid growth, anxiety will resurface. "I guarantee you that uncertainty'' about the inflation and rate outlook will crop up in coming days, he said. "The sentiment in the bond and stock markets changes as the wind blows."