New York Market: Earnings recovery fuels optimism

US STOCKS are likely to rise in the next few weeks, lifted by evidence that corporate earnings have recovered from four quarters of below-average growth. Sixty-five per cent of recent earnings reports have surpassed expectations including industry leaders such as Boeing and IBM, boosting optimism for the quarters ahead.

"This has taken us by surprise," said Edmund Cowart, a money manager with Banc One Investment Advisers. "There was concern early in the year that a slowing economy would mean lower profits, but it looks like earnings are coming through."

Fuelled by a 17 per cent gain in IBM, the Dow Jones Industrial Average rose 1.9 per cent last week, its fourth straight weekly advance. The S&P 500 gained 2.9 per cent. The Nasdaq, which suffered its third-biggest drop of the decade on Monday, soared 10 per cent from Tuesday.

Oil companies, hurt by lower prices for their products, haven't shared in the earnings bonanza. More of their earnings reports are due this week. Retailers, which did better, will report in mid-May.

Some of the largest industrial companies managed to report higher earnings largely by cutting costs to make up for meagre sales growth. Boeing's first-quarter earnings, for instance, surged ninefold. "We are seeing areas that have not seen life for the last three or four years come to life on earnings surprises," said Anthony Hitschler, director at Brandywine Asset Management.

For instance, Alcoa has jumped 23 per cent since the aluminum producer said first-quarter earnings rose an unexpectedly high 5.3 per cent. Acquisitions and cost cuts helped the company combat low metal prices. General Motors and Ford also reported higher-than-expected earnings.

"I have never seen the market so focused on revenue," said Joseph Williams, a money manager at Commerce Bank. "Earnings are in pretty good shape, but the market is extremely sceptical and going after stocks where revenue growth has not met expectations."

Soon to be reckoned with is the effect of the Y2K problem on technology firms. Sun Microsystems warned that its business could be hurt if customers delay purchases to focus on their own Y2K problems. Microsoft also warned that some companies may delay purchases. Some investors seemed unconcerned. "We don't think at this point it's something to worry about," said Bin Shi, manager with US Global Investors.