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Investors’ Earnings Fears May Have Come and Gone

The bond market thinks the U.S. economy is slowing, but the stock market already appears to be getting over the problem it had with that concept.

Stocks closed broadly higher last week, lifting the Dow Jones industrials 0.9% for the week, to 9,025.26 by Thursday. The Standard & Poor’s 500 hit a new high, and the battered Russell 2,000 index of smaller stocks gained a strong 1.8% for the week.

The mid-May-to-mid-June pullback in stocks, which took the Dow as low as 8,628, was ostensibly fueled by worries about slowing corporate earnings growth.

It’s not as if those worries were unjustified: Earnings tracker First Call says analysts’ consensus profit estimates for the blue-chip S&P; 500 companies have second-quarter earnings rising a mere 2.3%, on average, versus a year ago. That’s not the kind of growth that great bull markets are built upon.

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The slowdown in manufacturing is taking its toll on corporate profits in that sector, to be sure. We’ll find out in the next few weeks, as companies report their results, just how much investors are willing to overlook those numbers on the expectation that manufacturing activity will rebound later this year.

Meanwhile, as PaineWebber Group investment strategist Edward Kerschner points out, earnings should look quite good for many other U.S. companies. While manufacturers and commodity-based businesses are being hurt, companies in such consumer-driven industries as health care, retailing, media and financial services “should produce quite a few positive surprises in the second quarter,” Kerschner argues.

Overall, he says, “investors should be relieved by the earnings reports that flash on their screens in July.”


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