Slow growth rallies stocks

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The Independent Online
WALL STREET expects the slowest profit growth in almost seven years when the first-quarter earnings season begins in earnest this week. That's a recipe for a rally in US stocks, investors say.

Stocks are likely to rise because the analysts who work for big Wall Street firms typically cut their earnings forecasts by too much just before reports come out. That tendency has been especially pronounced this quarter as analysts fretted about the impact of Asia's slowdown.

Many investors expecting the worst could be pleasantly surprised by the profit reports. That means further gains for a market that already rose more during the year to date than many expected for the entire year.

"We don't see any end to the bull market," said Marshall Front, managing director of Trees Front Associates in Chicago. "As long as the outlook for corporate profit growth is good, the market's probably going to do well."

The Standard & Poor's 500 Index fell 1 per cent last week - its second losing week in the last three, though only the fourth weekly decline this year. The benchmark for the US stock market is up 14 per cent for the year. The Dow Jones Index, which closed above 9,000 for the first time Monday, rose 0.1 per cent for the shortened week. The technology-packed Nasdaq Composite Index dropped 2 per cent.

Stock prices struggled as pessimistic investors sold before the earnings reports. Semi-conductor stocks performed the worst after Advanced Micro Devices reported a larger than expected loss and Motorola said its profit was smaller than forecast.

Earnings scheduled for Monday include General Motors and NationsBank; Tuesday's line up includes Coca-Cola and JP Morgan; BankAmerica reports on Wednesday; Compaq Computer and Ford on Thursday; and Lucent Technologies on Friday.

"In an environment of continued moderate inflation and a very low probability of any sustained increase in interest rates, financial stocks should continue to do well," said Mr Front.

Some of the worst performing stocks in recent months should benefit from a growing sense that the greatest damage from Asia's slowing economies and devalued currencies has been done. "Commodity" technology stocks should see business improving by the summer or autumn, Mr Front said. That means analysts will be raising their ratings on the stocks in coming weeks, hoping to get their clients to buy the stocks just before they surge in price.

Still, earnings growth is likely to pick up as the year progresses, boosted by steady growth in the US and low inflation, which is expected to keep interest rates low.

Copyright: IOS & Bloomberg