New York Market: Share surge falters on rate-rise fears
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Your support makes all the difference.THE RALLY that has propelled the main US stock indices to records stalled last week, even as second-quarter earnings came in better than expected. The reason was the suggestion from Federal Reserve chairman Alan Greenspan on Thursday that the economy may be growing too quickly, and that any sign of inflation accelerating would force the Fed to raise interest rates.
Still, many investors expect borrowing costs to fall by year- end - and they are buying shares. "I think bond yields are moving lower, and that will be a positive for stocks," said Howard Kornblue, money manager at Pilgrim Capital. Stocks fell last week because investors are less willing to pay high price/earnings ratios as interest rates rise. The market, measured by the S&P 500, is trading at the highest p/e levels in decades. And the star performers carry far higher multiples.
Take Qualcomm, the biggest gainer in the S&P 500 this year - up 494 per cent. The maker of telephone equipment trades at 65 times expected 1999 earnings; Microsoft trades at 58 times expected earnings. Earnings are not expanding fast enough to warrant higher p/e ratios, strategists say. To get a boost, the market needs lower interest rates.
Neal Soss, chief economist at Credit Suisse First Boston, expects the yield on the 30-year bond to fall to 5.5 per cent in the months after the next Fed meeting on 24 August. "I would not be surprised by one more tightening, then that's it for the year." Last week, though, the spectre of rising rates sent the main indices lower. The Nasdaq fell 6 per cent, its biggest weekly drop since early October. The S&P 500 lost 4.4 per cent and the Dow Jones Industrial Average declined 2.7 per cent. All had set records last Friday.
The rout came despite the fact that 65 per cent of the 327 companies in the S&P 500 to have reported earnings have surpassed analysts' expectations. The average forecast for year-over-year earnings growth has risen to 13.7 per cent from the 11.2 per cent expected a week ago.
But the earnings gains were often not enough for investors. Citigroup, for example, fell 3.8 per cent despite reporting a 21 per cent rise in second-quarter profit.
One money manager was pessimistic about the outlook for stocks. "Everyone acts like the market will not go bad, but we could get a few bad days and just like last time be down 10 to 20 per cent before you know what happened," he said.
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