Profits Trump Weak Growth, Dollar in Rally

Stocks continue to rise on positive earnings, despite concerns about the U.S. economy.
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Asian and European economies are growing like weeds, while the U.S. may register its weakest quarter yet in this economic slowdown.

But the combination of weak U.S. economic growth, a weak dollar and better-than-expected profit growth are turning out to be the perfect recipe for U.S. stock investors.

The recent bullish attitude toward positive earnings surprises continued to trump any economic concerns Thursday. Stocks again rallied as traders awaited both Microsoft's third-quarter earnings report and the Commerce Department's first stab at first-quarter GDP.

"Bulletproof is the mindset of the markets right now," says Randy Diamond, trader at Miller Tabak. Diamond says investors expected

Microsoft

(MSFT) - Get Report

to surprise to the upside, and they expect the Commerce Department to deliver a weak report.

So far, Microsoft has delivered. The technology company reported a 32% year-over-year rise in its earnings and beat Wall Street expectations. Shares were up 4.5% in after-hours trading. Others delivered strong reports as well.

Apple

(AAPL) - Get Report

blew past expectations late Wednesday, while

3M

(MMM) - Get Report

,

Ford

(F) - Get Report

and

Exxon

(XOM) - Get Report

also posted better-than-expected reports Thursday.

The

Dow Jones Industrial Average

screamed past the 13,000 mark Wednesday and didn't look back. The Dow closed up 0.1% at 13,105.50 while the

Nasdaq Composite

finished 0.3% higher Thursday at 2554.46. The

S&P 500

closed down 0.8% at 1494.25.

"If the markets get a positive Microsoft and an in-line GDP number, the bulls will cast their eyes toward another record," says Diamond, referring to a record high close in the S&P 500. The broad index's record high is 1527.46, registered on March 24, 2000, and it is just a little more than 30 points away.

Halfway There

Microsoft has delivered its end of that bargain. Now it's the government's turn.

Analysts expect the Commerce Department's first of three estimates of first-quarter output to register 1.8%, well below trend growth of 3% and lower than the fourth quarter's 2.5% growth.

The pace of consumer spending, which comprises about 70% of GDP, is likely to remain a positive, says John Lonski, chief economist at Moody's Investors Service. He believes spending will grow at about 3% year-over-year in the quarter.

But on the other side of the ledger, housing -- or residential construction spending, about 8% of GDP -- will remain weak, and business investment spending may be softer than in recent quarters, says Lonski. Likewise, economists say trade, or exports -- which had been a driver of higher-than-expected GDP estimates in prior quarters -- may not see another big gain in the first quarter.

Some say the government has measurement problems, and that traders should not pay too close attention to this first estimate. Joe Brusuelas, chief economist at IDEAglobal, notes that the

Federal Reserve

warned that flaws in estimating auto sector industrial production would mean the initial GDP estimate will underestimate the

true rate of growth.

But Lonski notes that quibbling over 1.2% or 2.2% may not be so useful. Rather, the GDP report will tell us about the consumer, about inflation in the core PCE deflator, and about the soft business spending that Federal Reserve officials have mentioned in recent speeches and testimony. Whatever the number, "below-trend is practically a foregone conclusion," says Lonski.

What it may finally say is that while investors certainly don't cheer weak growth forever, as long as it is bringing down inflation, staving off rate hikes, and not threatening profits too much, it's just fine.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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