Stocks boosted by strong profit reports from Wall Street banks

Stocks boosted by strong profit reports from Wall Street banks
Traders work on the floor of the New York Stock Exchange. Investors were in a buying mood thanks to an improving picture for corporate earnings, analysts said. (Scott Eells / Bloomberg)

NEW YORK — Investors pushed major U.S. indexes to a fresh round of all-time highs this week after strong profit reports from Wall Street banks were seen as another sign that the economy is improving.

Citigroup Inc., Goldman Sachs and Morgan Stanley all reported that their investment banking business did big business during the second quarter. Analysts viewed that as a sign companies are turning to major financial firms to raise money and expand.


Bulls hope that stronger corporate profits will help the underlying value of stocks and keep this year's rally going. It also would help the market stand on its own, instead of being propped up by the Federal Reserve's stimulus measures.

"Investors are going through a metamorphosis," said Sam Stovall, chief equity strategist at S&P Capital IQ. "It appears as if the economy is growing on its own."

Both the Dow Jones industrial average and the broader Standard & Poor's 500 index have soared nearly 19% this year in what is so far the fifth-best bull market in history. The S&P 500 is up nearly 150% from its bear-market low in early 2009.

The S&P 500 set another record high Friday, rising 2.72 points, or 0.2%, to 1,692.09. The Dow slipped 4.80 points, or 0.03%, to 15,543.74. But the technology-heavy Nasdaq composite fell 23.67 points, or 0.7%, to 3,587.61. It was the only major index to lose ground for the week.

About $150 billion flowed into the U.S. stock market during the week, according to the Wilshire 500 Total Market Index.

Investors were in a buying mood thanks to an improving picture for corporate earnings, analysts said.

Of the 104 companies that so far have reported earnings for the second quarter, 69 of them — about two-thirds — beat analysts' estimates for growth, according S&P Capital IQ.

The research firm expects that S&P 500 companies will collectively post 3.6% earnings growth in the second quarter. Revenue growth — elusive in previous quarters — has been surprising Wall Street analysts.

"So far the corporate earnings have really been nice across the board," said Alan Whitman, managing director at Morgan Stanley Wealth Management in Pasadena.

Although there are signs that economic growth is lifting corporate bottom lines, the Fed has also been soothing investors.

After the central bank signaled that it could begin slowing down its massive $85-billion-a-month stimulus program as soon as later this year, stocks tumbled 6% from late May through late June.

Since then, Fed Chairman Ben S. Bernanke has made clear that the central bank will do what it takes to make sure the economy can grow on its own before dialing back its monthly bond purchases.

Speaking before Congress this week, Bernanke said the Fed would not cut off stimulus until the economy shows much more improvement.

"I agree that we need accommodative monetary policy for the foreseeable future," Bernanke said.


Although the Fed won't commit to a time frame for it to begin "tapering" its stimulus, analysts expect the drawdown to begin as early as September or December, or perhaps next year.

Investors have indeed been soothed. After last month's convulsions, one measure of volatility has fallen from its June levels. The CBOE Volatility Index, or VIX, sank to about 13 as of Friday, down from about 20 in late June.

But calm markets — for now — don't necessarily mean that investors are ready for the Fed to dramatically scale back its bond-buying.

"It's going to take more than one quarter or two quarters to convince investors that the Fed can just walk away," pulling back its stimulus, Whitman said. "Psychologically, we still need it."