Joe Battipaglia's Market Commentary
( Steve, he has been very accurate so far, including Spring/Summer time!!!)
gruntal.com
Monday, September 18, 2000
Weekly Perspective
Without missing a beat, the equity market has gone from concern over rising interest rates to a possible slowdown in
earnings growth. I do not share these concerns. Instead, I believe that companies will again deliver significantly higher
than average earnings growth this quarter. Today’s environment of full employment, robust investment spending, and
accelerating productivity is creating an ideal environment for companies to deliver excellent bottom line results. This
year’s record of strong earnings growth in the face of a half-dozen increases in short-term interest rates supports this
line of reasoning. Although I do not expect earnings growth to remain above 20 percent indefinitely, it is reasonable to
conclude that the positive long-term effects of globalization, innovation, deregulation and competition continue to lift the
potential long-term rate of growth corporate profits in the U.S..
According to a recent survey of analysts by First Call, third quarter S&P 500 earnings are expected to rise 17.3% versus
last year. This is actually an increase from the 17.1% expectation just a few weeks back. First Call goes on to suggest
that since analysts tend to underestimate earnings growth in any given quarter actual growth could easily be as high as
19%. This is a very positive outlook and should help maintain very high growth rates for the full year when combined
with the 23.6% and 21.6% growth in S&P 500 earnings, for the first and second quarters. One key sector driving this
growth remains technology. First Call now estimates that this sector should see earnings expand by 37% versus the
same period last year. My overall forecast for growth in S&P 500 operating earnings remains $61 this year and $69
next year.
Last week’s surprise drop in the consumer price index helps support my thesis that inflation will remain quiescent in the
months ahead. At this time, both the consumer price index and producer price index are showing clear signs of
deceleration – a notable departure from the concerns of last spring. At that time, my forecast called for a gradual
slowdown in consumer spending in response to higher interest rates along with the typical ebbing of consumption that
follows an extended period of growth. My forecast also called for an end of credit tightening by the Federal Reserve to
become effective before the fall. Thus, last week’s report showing August CPI dropping -0.1% in the core rate (despite
surging energy prices) is right on schedule. Similar readings were found in the producer price index. Moreover, the
year-over-year rates of core inflation at the consumer and producer levels continue to decelerate. Year-over-year, core
consumer prices are up just 2 *% and core producer prices are up just 1 *%. There is clearly no inflationary trend at
work here. As I stated earlier this month, I believe that such benign inflation data along with relatively high short-term
rates will provide the Federal Reserve enough reason to lower interest rates by the end of the first quarter of 2001. Oil
prices remain a concern in terms of economic activity, but I expect stabilization to be achieved as supply catches up with
demand.
So as we approach the start of the fourth quarter many of the factors underpinning the bull market are still very much
in place. In just a few short months, the fear of rising inflation and higher interest rates have eased. Productivity
growth continues despite being almost eleven years into an economic expansion. This increased efficiency, coupled
with consistent demand, should help sustain profit growth well above historic averages in each of the next several
quarters. Lastly, the market’s breadth appears to be improving with more companies turning in positive
performances in terms of their stock price since the beginning of the summer’s rally. The market’s recent pullback
should prove short-lived and I expect third quarter earnings to provide the needed catalyst to extend the summer’s
rally into the fourth quarter and first half of 2001. |
