Weekly Recap

The stock market rallied sharply this week. It was due to a developing sense that the fundamentals are improving. There was not a lot of specific news to account for the gains.
On Monday, the S&P surged 21 points. There was some good news, but it was hardly of the nature that would normally spark a large rally. HCA announced that it would go private in a $33 billion deal. AMD announced it would acquire ATI technologies for $5.4 billion. These announcements continued the trend of a high level of acquisitions.

Merck, BellSouth, and Schering-Plough had good earnings reports. There was even an analyst upgrade on Dell, which had taken a beating the week before after warning of lower than expected second quarter profits. That's all good, but it's hardly the basis of a 1.7% rally in the S&P.

The positive tone continued on Tuesday. Stocks opened lower following the big Monday move on the expectation that the see-saw pattern of recent weeks would continue. But the market rallied strongly in the afternoon and the S&P managed an 8 point gain.

This was a very good performance considering that the news was mixed. UPS had a poor earnings report and warned, and 3M reported profits below expectations. Altria, AT&T, and Texas Instruments had produced good reports, but that wasn't enough to offset the bad news - at least in the morning. The afternoon rally was spurred by an analyst upgrade to UPS. The news was still negative in net for the stock, but the market rallied nonetheless.

Wednesday the market was flat and Thursday there was a bit of profit-taking as the S&P 500 lost 5 points. The earnings reports continued to lean bullish. There were so many reports it is impossible to list even the major ones, but the biggest were perhaps that General Motors had a surprisingly good report, ExxonMobil and other oil companies reported strong numbers, and a number of manufacturing firms such as Cummins and Ingersoll-Rand posted strong numbers. Amazon represented a notable miss.

The second quarter earnings are now headed for a 13% to 14% increase in operating earnings for the S&P 500 in aggregate with about two-thirds of the companies having reported. That is obviously a very strong gain. And guidance has been good enough to keep third quarter estimates at 12% to 15%. The earnings numbers may not have prompted the rally this week, but they certainly provided support.

The economic data was light this week, but the GDP number on Friday sparked another upward move. The S&P jumped 15 more points as a modest increase of 2.5% in second quarter real GDP growth was posted. The breakdown of the data suggested the Fed is getting the soft landing they desire. There is no indication of a sharp slowdown in the economy.

The slower growth led the market to conclude that the Fed probably won't raise rates at the August 8 meeting. That boosted stocks on Friday. The probability of a rate hike in August, as measured by the fed funds futures market, dropped to about 35% on Friday from 45% on Thursday.

The S&P thus ended the week with a very strong 3% gain even though there was not much economic data, and earnings reports weren't good but not surprising. Nevertheless, there is a growing belief that the Fed might not raise rates further, that economic growth will slow only modestly, and that earnings growth will continue in the second half of the year. That is a good formula for the stock market to post gains through year-end.

There are certainly concerns. Oil ended the week at $73 and it could jump at any time on geopolitical events or a disruptive hurricane. Inflation might inch higher and prompt the Fed to raise rates further. Yet, overall, the underlying market tone is improving as the worst fears are fading.

-- Breifing.com