However, the rally was prompted by more than just bargain hunting in a deeply oversold equity market. There was also optimism ahead of the start of second-quarter earnings season. Is that optimism justified? That is the question that will be answered over the coming fortnight, when so many key corporate entities will be issuing their interim reports and their appraisal of the profit landscape for the coming third and fourth quarters. Our sense continues to be that the second quarter was a dazzling one for earnings. So, in that narrow sense, the optimism looks justified.
That said, we are not all that optimistic about the coming quarters. The reason is the economy. The market's surge last week, as indicated, was likely earnings driven. But there was little upbeat of note on the economy. Indeed, after a fast start to the second quarter, most of the principal indicators, from housing construction, to home sales, to employment, to manufacturing, were lackluster, at best, and highly disappointing at worst. True, following the first-quarter's downwardly revised GDP growth of 2.7%, the recently ended three months at first looked as though it would produce growth of 4%, or even a little more. Now, though, we are concerned that growth may not have exceeded 3% by much. Worse still, the presumptive growth in the third and the fourth quarters is likely to be less, perhaps materially so.
That is not good news for earnings, where profit growth will probably ebb in the second half. So, while we are upbeat about results in the just-concluded April-to-June period, we are concerned that some companies may throw cold water on things by expressing caution for the succeeding quarters. For now, though, optimism rules, and the market, after a possible mixed-to-slightly lower opening this morning, is probably headed higher in the short run.
Finally, in addition to earnings reports, which will soon start to trickle in, led by aluminum giant Alcoa (AA) and chip maker Intel (INTC), the coming five days also will see the release of data on the international trade deficit, retail sales, business inventories, producer prices, initial jobless claims, and consumer prices. Inflation is likely to have remained benign, but other data, especially on the retail front, where sales may have weakened further last month, is more problematic, we think. Stay tuned.