Market Commentary by Joe Battipaglia for July 10, 2000...
gruntal.com
>>> Weekly Perspective
The Federal Reserve’s six interest rate increases over the past twelve months have finally eased the U.S. economy toward a more moderate pace of growth. A growing collection of fresh data supports my long held view that output will moderate toward a respectable 4% annualized rate by year-end from the 7.3% rate measured in the fourth quarter of last year.
The most recent addition to this series was Friday’s weaker-than-expected June employment report that showed a mere 11,000 non-farm payrolls added during the month and that hourly wages grew at a mild 3.6% year-over-year pace. Such visible signs of slowing amid an absence of any real inflation threat should provide the Federal Reserve ample room to forego additional tightening this year.
Some slowing, however, does not necessarily mean that earnings must suffer. To the contrary, expectations for growth in S&P 500 operating earnings have risen steadily throughout the year just as they had the year prior. Currently, earnings are expected to expand by 18.6% for all of 2000. With approximately 20% growth already expected for the first half of the year, and few warnings for the second quarter, this estimate may indeed prove low and prompt additional upward revisions to top-down forecasts in the coming months.
Once again, the combination of strong productivity growth, high levels of capital investment in technology and equipment, consumer spending and better results from foreign company affiliates are all helping keep earnings growth on a steady keel. Recent history also demonstrates that earnings can remain robust following a period of credit tightening. During 1995, which was the last year following a significant tightening of credit, S&P 500 operating earnings rose in excess of 18%. That year was among the best years for earnings growth during the 1990’s and helped lift the S&P 500 composite index over 34% for that year.
As the months progress, therefore, I believe that concern over higher interest rates will fade further and that growth in corporate earnings will once again become the primary catalyst for lifting equity values. In this regard, I expect the higher earnings growth profile of the NASDAQ composite to deliver the best performance and provide leadership for the broader market. The summer rally, which began just after Memorial Day weekend, has seen the NASDAQ composite gain nearly 25% versus the S&P 500 and Dow Jones Industrial Average which have returned 7.3% and 3.3% during the same period.
I am maintaining my year-end targets on each of the major indices and have made no change to my asset or sector allocations at this time.<<< |
