M&A Activity Buoys Stocks

A fresh wave of buyouts plus earnings from Merck pushes indexes higher Monday after Friday's sell-off

by Ben Steverman

Another wave of M&A activity, plus earnings news from Merck, pushed stocks higher Monday as markets approach the heart of second quarter's earnings season.

On Monday, the Dow Jones industrial average climbed 92.34 points, or 0.67%, to 13,943.42. The broader S&P 500 index gained 0.77%, or 11.8 points, to 1,545.90. The tech-heavy Nasdaq Composite index edged up 2.98 points, or 0.11%, to 2,690.58.

Stock indexes were bouncing back a bit from Friday, when major averages fell more than 1%, including the Dow, which fell from its record close above 14,000. However, Monday's recovery was weak: for every 17 stocks dropping in price on the New York Stock Exchange, 16 rose in price. On the Nasdaq, the ratio was 16-14 negative.

Two weeks into earnings season, corporate profits are projected to rise 6%, according to Reuters Estimates. That compares to a 5.6% increase predicted by analysts when earnings season started two weeks ago. The projections take into account earnings reports as they are released as well as estimates for companies with earnings still to come.

In the first two weeks, 130 companies in the S&P 500 reported earnings, but another 174 are expected to report this week. 3M (MMM), Corning (GLW), Apple (AAPL), Colgate-Palmolive (CL), Exxon Mobil (XOM), Dow Chemical (DOW), and Black and Decker (BDK) are among the marquee names releasing results.

Gary Wolfer, a portfolio manager and chief economist at Univest, says so far corporate profits have been somewhat disappointing. He cited poor results from Caterpillar (CAT) last week as a sign industrial companies were faring poorly. "The housing market is probably going to act as a drag at least into 2008," he says.

Still, Wolfer believes the stock market rally could continue despite profit weakness. "The market is looking beyond second quarter earnings to the second half," Wolfer says, adding he expects profits to rebound especially in the third quarter.

Chris Johnson, chief market strategist at Johnson Research Group, says expectations have risen too high for earnings from many stocks. Google (GOOG), for example, fell Friday and again on Monday when its earnings didn't meet investors' sky-high expectations. "We still think on a stock-by-stock basis there are some fantastic opportunities," Johnson says. "You want to avoid companies that have become overbought or over-loved by the Street."

On this week's economic calendar, housing will take center stage yet again. Investors will pay lots of attention to the latest new and existing home sales figures for June due out Wednesday and Thursday. Reports on durable goods orders for June, on Thursday, and second-quarter U.S. gross domestic product, on Friday, will also be closely followed.

In the energy markets Monday September NYMEX crude oil futures were down 89 cents to $74.90 a barrel. Action Economics says selling may have been prompted by reports OPEC is concerned high prices might slow down world economic growth.

Among the earnings news Monday, Merck & Co. (MRK) reported earnings of 82 cents per share, 11 cents above analysts' estimtes, and vs. 73 cents a year ago. Worldwide sales were 6% higher, and the firm raised its 2007 earnings guidance. The stock was up 6.75%, helping spark a 1.85% rise in the pharmaceuticals industry.

Schering-Plough (SGP) reported earnings of 34 cents per share, vs. 16 cents a year ago. Revenues rose 13%. Shares were up slightly.