Earnings Will Keep Rocking, but the Week Belongs to Greenspan

Microsoft and other earnings heavyweights notwithstanding, the market will key on the Fed chief's Thursday Humphrey-Hawkins testimony.
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With titans like

Microsoft

(MSFT) - Get Report

set to report their numbers, you might think the coming week is all about earnings. It is not.

That's a bit of a shame, since earnings have been so darn good. So far, according to

First Call

,

S&P 500

companies have been beating estimates by a hefty 3.8%. A second-quarter earnings gain of 15% over last year certainly seems doable. Moreover, companies have been extremely upbeat about their third-quarter prospects -- a good example of that was

Intel

(INTC) - Get Report

, whose uncharacteristic optimism on how its business is going helped push its stock higher despite earnings that were a bit below estimates.

But it's the chairman's show next week.

Fed

head

Alan Greenspan

will be delivering his twice-yearly

Humphrey-Hawkins

testimony on Thursday, and until people see what he's had to say, nobody on Wall Street is going to have a heck of a lot of conviction on whether the market should be heading up or down. About half the people say the Fed will move rates up at its August meeting, half say it won't, and none of them seem to have much confidence that they're right.

Big Al has a tough act to put on. Since the Fed raised rates June 30, the economic data have been benign to downright benevolent. "Right now, based on all the numbers we've seen recently, you have to say the Fed stays on hold Aug. 24," said Don Fine, chief market analyst at

Chase Asset Management

. The problem for Greenspan, however, is that between now and then, there's "a whole other round of numbers," Fine added. "This time around, Greenspan will have to do a bit of a soft shoe."

It's likely that Greenspan will "lay out the guidebook" on monetary-policy thinking, said Mitchell Held, economist at

Salomon Smith Barney

, who also thinks "probability favors inaction at this point."

This all leaves Fine thinking Greenspan will give a pretty even-handed speech. "They have a neutral bias," said Fine. "It's hard for me to imagine Greenspan getting up, after all this

good data, and saying that they're moving toward tightening."

If Fine's right, that could be a darn fine thing for the stock market. Freed of its interest-rate worries, it could turn its focus to those fine second-quarter numbers and what companies have been saying about the third quarter. For bulls, that'd be a damn good thing.

There are those, however, that fret about how high stocks have gone and worry that any move up will be a last-gasp rally before a big fall. They point out how high P/Es have gotten, and say that with the bond yield near 6%, stocks are overvalued by 30%. They worry that this year will look like last year and the year before -- a summer top in late July and then a big decline. This is a stock market itching for a fall (and lookit all the trouble in China and Taiwan lately -- ominous).

But though he once worked under

Morgan Stanley Dean Witter's

Byron Wien -- a guy who's among the worriers -- Tom McManus, equity portfolio strategist for

Banc of America Securities

, doesn't buy the stocks-are-overvalued talk.

"When people say the market is historically overvalued," said McManus, "they're comparing apples to oranges. Valuations are in the stratosphere -- compared to what? What they were in the '60s? What they were in the '40s?"

Things have changed. Even 10 years ago, the S&P 500 was stocked with far more industrial concerns -- manufacturing was a far greater part of our economy. With the shift to more of a services-based economy and the advent of information technology, the S&P is a very different index. Microsoft, the company that is now the largest component, traded (split-adjusted) at less than a buck 10 years ago.

"If you can understand why

General Electric

(GE) - Get Report

carries a higher P/E than

General Motors

(GM) - Get Report

," said McManus, "you can understand why today's P/Es are higher than in the past. I would contend that a service business is a higher quality business than a manufacturing business."

People who do valuation work have tried in various ways to capture the shift in the S&P, but things have moved at such a quick pace that they may not have altered their models quickly enough. "When something as revolutionary as harnessing the power of millions of computers networked together has occurred," said McManus, it's hard to keep up with the pace of change.