Stock markets in the United States have been setting records
lately, despite economic conditions that hardly seem like a recipe
for boom times on Wall Street.
Gasoline has jumped above $3 a gallon in price, yet the Dow Jones
Industrial Average recently pushed above 13000 for the first time in
Economic activity in the US is slowing, due in part to a housing-
market slump, yet the Standard & Poor's 500 index is flirting with
its historic high of 1527.46 set in 2000.
What gives? How far can this stock market go?
One explanation for the bullish performance could be that Wall
Street is misreading an economy that faces trouble on several
fronts. That would be bad news for future profits.
But other explanations are more prevalent among financial
professionals. Two factors in particular stand out: strong
conditions beyond US borders and a merger binge that is pushing up
share prices of target companies.
"A lot of major companies have done very well with their overseas
markets," says Robert Carey, chief investment officer at First Trust
Advisors, an investment firm in Lisle, Ill. "The distinction between
US companies and foreign companies is getting very hard to draw."
Companies like IBM, Coca-Cola, and Intel - all among the 30 in
the Dow Jones Industrial Average - derive well over half their
revenue stream from overseas.
In the final quarter of 2006, US-based corporations saw the
earnings of their foreign affiliates surge to an annualized level of
$272 billion, up 38 percent from the pace in the fourth quarter of
2005. That amounts to about 15 percent of all US corporate profits,
as measured by the US Commerce Department.
Emerging markets such as China are a key source of growth for
American corporations. But lately, US exports have also been aided
by a stronger economy in Europe, where more than half of those
foreign-affiliate profits come from.
Record profits, meanwhile, give corporations and investors lots
of money to invest. Many companies are buying back some of their own
outstanding shares, a tactic for returning profits to shareholders.
Others are using the money as fuel for takeovers.
The merger wave has buoyed share prices in the US and beyond.
Media companies such as Dow Jones and Yahoo are among the stocks
that have surged early this month on rumors of possible acquisition
(by News Corp. and Microsoft, respectively).
Treasury Secretary Henry Paulson, speaking on May 3 to students
at the Harvard Business School in Boston, called the past three
years "a global economy that's as strong as anything I've seen in my
For now, the good times for American businesses are rolling
along, even though forecasters agree that the rate of profit growth
is slowing from double-digit rates.
Mr. Carey is in the upbeat camp of investing strategists who
think the stock rally has room to run this year - with the Dow
reaching 14000 by year-end in a First Trust Advisors forecast.
"The issue is profits," he says. …