Earnings Optimism Boosts Stocks

Strong reports from the likes of Google and Caterpillar -- and news of smaller than expected writedowns from Citi -- fueled Friday's rally

by Will Andrews and Ben Steverman

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Investors, nervous about slowing corporate profits – and bombshell announcements from big financial firms – breathed a sigh of relief Friday, thanks to strong results from stalwarts like Google (”GOOG”), Caterpillar (”CAT”), and Honeywell (”CAT”), and news of smaller-than-expected writedowns from Citigroup (”C”). The reports helped to ease investor concerns about the outlook for corporate profits.

And that relief helped fuel a rally for major U.S. stock indexes.

On Friday, the blue-chip Dow Jones industrial average finished higher by 228.87 points, or 1.81%, to 12,849.36. The broader S&P 500 index added 24.77 points, or 1.81%, to 1,390.33.

The tech-heavy Nasdaq composite index was the best performer among the major market benchmarks, climbing 61.14 points, or 2.61%, to 2,402.97.

On the New York Stock Exchange, 24 stocks were higher for ever seven lower in price. On the Nasdaq, the ratio was 21-8 positive.

Short-covering also was credited with boosting stocks, as was trading late in the session as stock options expired. Trading volume was moderate, suggesting some conviction is returning to the market, according to S&P MarketScope.

Treasuries ended mixed. The dollar index rose, sending gold futures lower. Crude oil rallied on short-covering and reports of unrest in Nigeria.

Richard Sparks of Schaeffer’s Investment Research says Friday’s stock market rally was “based on the absence of bad news coming out of the financials and credit markets.” Ever since last month’s blow-up of Bear Stearns (”BSC”), financial stocks have reported more weak results, but no “bombshells,” Sparks says. “That’s actually been received quite positively by the market.”

“Good earnings propelled the market higher,” says Peter Cardillo, chief market economist at Avalon Partners. Plus, the expiration of options of Friday meant short sellers, investors betting against the market, “got caught on the wrong side.” So far, this earnings season feels like a repeat of last quarter’s earnings reports, with “multinationals doing well and domestics weak,” Cardillo says.

With little major economic data next week, “the market will continue to focus on earnings,” Cardillo says. Sparks agreed. “Earnings are going to take center stage,” he says, adding the big question is: “Can non-financials beat [expectations] and can the financials’ [earnings] come out and not spook the market?”

Indeed, most market attention next week will be on first-quarter earnings announcements -- 150 of them for companies in the S&P 500. By the end of the week, investors will have a much better idea of just how hard earnings are getting hit as the economy slides toward recession.

On the economic front, next week will offer investors updates on two crucial sectors: home demand and capital spending by businesses. On Wednesday, investors will weigh a report on March sales of existing homes, which have shown some signs of stabilizing in recent months. And on Thursday, March data on new home sales, which have continued to slide, will be released. Also on Thursday, the report on March durable good orders will provide data on orders and shipments of capital goods, which will show the extent to which companies are reining in their expansion plans.

Lehman Brothers economist Michelle Meyer says the firm “believes the economy has slipped into a mild recession and expects the recovery to be feeble.” Lehman’s looks for “a mild recession and feeble recovery in 2009 implies a bigger cumulative growth shortfall than either the 1990 or 2001 recession.”

Philadelphia Federal Reserve Bank President Charles Plosser warned Friday of "rising inflation" and said central banks should uphold the purchasing power of their currencies. He said the Fed, unlike some other central banks, is not only charged with maintaining price stability, but also has a mandate to support sustainable growth.