Why Wall Street isn't flying higher

"There is just no pricing power for US companies to increase revenues and thus earnings," says Arnold Kaufman, editor of "The Outlook," a financial review published by Standard & Poor's Corp. in New York

Inventories, although being worked down, remain high, he says. The bottom line: US companies find themselves in a rut in terms of future profit gains, which makes stocks relatively unattractive, Kaufman says.

Moreover, analysts say the exposure of accounting irregularities at Enron and other firms is prompting many large companies to take steps to clean up their bookkeeping practices – sometimes lowering reported earnings. And Wall Street firms, too, have been under fire for overhyping stock prospects.

For all the uncertainty about profits, not all stocks have been mired in the doldrums.

Indeed, while large-company and technology stocks have been sagging, smaller and mid-size companies have fared well, notes Mr. Piskorowski of Prudential.

The so-called "small-caps," for one thing, are less exposed to current difficulties of the global economy – including a strong dollar that crimps US exports.

Also, smaller companies never rose to the heady altitudes of big-name stocks like General Electric (down 21 percent so far the year) or AOL Time Warner (down 44 percent).

Currently, the large firms in the S&P 500 stock index still have shares that are high-priced by historical standards.

The stock of the average S&P 500 firm is selling for 20 or more times its earnings, versus a historic average in the mid-teens. Simply put, big-name stocks still aren't cheap, even after the setbacks of 2000-2002. When companies are expensive, investors are reluctant to buy.

A divide exists not only between Wall Street and Main Street – with the economy headed up as the market struggles – but also between small investors and large institutional players, such as pension fund managers.

While big investors wait to commit hoards of cash to market, small investors generally have been hanging on to their portfolios, according to analysis by information firm Strategic Insight in New York. Money poured into stocks in March, the latest month for which final figures are available. Most of it came from smaller investors socking away earnings in retirement accounts.

"We're not in a true bull-market rally," in 2002, says Christopher Johnson of Schaeffer's Investment Research in Cincinnati. He says any market gains in recent weeks have been "bear market rallies," upward blips appearing in an overall down market. "There is fundamentally no reason to be optimistic about the market," he says.

Most market analysts do not expect a quick turnaround. "Eventually the market will get back on track, perhaps in the second half of this year, says Robert. MacIntosh, chief economist at Eaton Vance in Boston.

Page: 1 | 2