US stock markets are hitting record highs. But why?
A slowing US economy hasn't dampened Wall Street. Global markets, mergers are a buffer.
from the May 8, 2007 edition
Page 2 of 3
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.
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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 business career."
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. "This quarter has been a complete shock to a lot of people," as earnings handily beat expectations.
The share price for the S&P index is now about 16 times the earnings for its 500 companies, Carey says. That doesn't qualify as cheap on Wall Street. But "it's a pretty reasonable multiple," he says.
Certainly, it reflects a more balanced investor mood than existed in early 2000, just before the dotcom stock bubble burst, which helped set the stage for a wider sell-off.
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