Batman remains bullish - for a change...<BG>
Slower economy won’t affect earnings
By Joseph V. Battipaglia, CBS
MarketWatch.com
Last Update: 12:02 PM ET Jul 10, 2000
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NEW YORK (CBS.MW) -- The Federal Reserve's six interest rate
increases over the past 12 months have finally eased the U.S. economy
toward a more moderate pace of growth.
A growing collection of fresh data support my
long-held view that output will moderate toward a
respectable 4 percent annualized rate by the end of
the year from the 7.3 percent 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 an
hourly wage increase of only 3.6 percent
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 percent for all of
2000.
Earnings growth steady
With approximately 20 percent 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 percent. 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 percent 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 percent vs. the S&P 500 and Dow
Jones Industrial Average which have returned 7.3 percent and 3.3 percent
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.
Joseph V. Battipaglia is chairman of investment policy at Gruntal &
Co. |
