NEW YORK -- Improving economic news has gotten most of the credit for the stock market's recent surge, but in truth, Wall Street's increasing optimism has been equally important. For the first time in months, investors are thinking more about buying than selling.
That change in attitude is the latest indication that a market and economic turnaround might have started. But analysts still caution that investors tend to be fickle and that, after two years of disappointments, they will be watching earnings numbers very carefully.
"Investor sentiment has been a show-me attitude and we've been 'shown' by the recent economic news," said Charles Pradilla, chief investment strategist at SG Cowen Securities. "But we don't have a cheap market right now and the only thing that's going to drive it going ahead are earnings. We will need more good news for more sessions."
First-quarter earnings reporting season begins in April, with some companies expected to warn or revise their forecasts before then. A raft of stronger-than-anticipated economic news -- ranging from fewer job claims to improving manufacturing data and bullish comments from Federal Reserve chairman Alan Greenspan -- has raised expectations that more companies will say business is improving, and possibly raise profit estimates for the rest of 2002.
There is also the hope that actual earnings will be better than the forecasts, simply because many analysts and companies have been extremely conservative in their estimates. Amid the fallout from Enron and with memories of the bear market still fresh, no one wanted to risk being wrong.
"They haven't wanted to raise the bar too much until they're absolutely sure they can deliver," said Robert Streed, portfolio manager of Northern Select Equity Fund. "Now that we've passed through the trough and the economy is clearly improving, I think there's a better chance that earnings will be stronger sooner than expected."
So far, most companies have indicated that their business is stabilizing, with some improvements. The current rally kicked off on Feb. 25, the same day General Motors raised its first-quarter and 2002 earnings projections and said it is increasing production, citing better-than-expected U.S. sales.
This past week, Intel rose after tightening its first-quarter sales forecast to a range still in line with most analysts' guidelines. Sun Microsystems and Sprint also advanced after reaffirming their quarterly outlooks. Investors also bid Best Buy higher after the electronics retailer increased its earnings estimates.
But some question whether those types of results will be enough. Although the consensus is growing that the U.S. economy is emerging from recession, there is debate over how strong the recovery will be.
Should corporate profits only improve modestly, some investors might decide stocks have become overpriced.
"Historically, late March-early April has been a good time for a correction. I'm a little concerned we're headed for another one of those," said Richard A. Dickson, technical analyst at Hilliard Lyons, recalling last spring's selloff.
Caveats aside, however, there is still reason to hope that this rally will fare better than its predecessors.
The market's current surge corresponds to solid improvements in economic and earnings news, unlike last year -- when declining profits and worsening outlooks sandbagged winter and summer rallies.
There's talk the Federal Reserve might start raising interest rates later this year, but for now they are low, making the rates-of-return on cash savings accounts less than inspiring.
"When your money market is yielding less than 2 percent, you only keep it there until you can find somewhere else to make more money," said Streed, the Northern Select Equity Fund manager. "There is a lot of incentive to put your money back in the stock market."
For the week, the Dow Jones industrials rose 203.63, or nearly 2.0 percent, to 10,572.49, after gaining 47.12 Friday. It was the blue chip index's fourth straight week to advance.
The Nasdaq composite index ended the week up 126.93, or 7.0 percent, after advancing 48.04 on Friday. The Nasdaq closed at 1,929.67.
The Standard & Poor's 500 index had a weekly increase of 32.53, or 2.9 percent, after rising 6.77 Friday to 1,164.31.
For the week, the Russell 2000 index, the barometer of smaller company stocks, rose 21.51, or 4.5 percent. The Russell advanced 4.93 Friday to close at 499.85.
The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.89 trillion, up $330.66 billion from the previous week. A year ago the index was $11.331 trillion.
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