More bad news for the bears from the Cover Story of Barron's. Geez, when Barron's starts publishing bullish information, things must be a lot better than I thought. :-)
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Even the somewhat pedantic cast of Cohen's prose affords a measure of comfort to panicked clients. In the note, she takes on various bear concerns and offers measured, temperate responses:
No, U.S. corporate earnings aren't going to be scissored by a combination of poor Asian demand, weak corporate pricing power and growing wage inflation. In fact, S&P 500 operating earnings per share should be better this year than most people think. Her preliminary estimate for its second-quarter growth in the number is about 5.7%. And the quarterly comparisons should get easier in the second half when stacked up against progressively weakening results in comparable 1997 periods. And even if the global economy doesn't improve later this year as she expects, companies in the S&P should still be able to notch second-half earnings growth of 5% or even 6%.
Likewise, she feels that the menace of the Asian economic crisis and the rise in the dollar have been overblown. The tilt of U.S. exports toward value-added goods and services makes them less vulnerable to competition on the basis of price and relative exchange rates. Too, such concerns ignore the many benefits that a stronger greenback confers on U.S. companies. Among other things, it lets them pay less for raw materials and semi-finished components sourced overseas. The bounding buck also allows companies to make advantageous foreign direct investments in overseas facilities and operations, which down the road will burnish the bottom line.
Finally, she sees little to no sign of a recrudescence in inflation. Rising inflation and its unwanted progeny, higher interest rates, are what typically end bull markets. Yet the best measures of economy-wide inflation, such as the GDP deflator, still sport annualized rates under 1%. Productivity increases continue to insulate U.S. corporate profit margins from erosion due to rising labor costs. Much of the 4% jump in second-quarter service compensation costs represents "bonuses and other forms of variable compensation," according to Cohen's latest note. These are discretionary items that can be cut if company profits become pinched.
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