Belfast Telegraph

Friday 22 August 2014

Wall Street soars after debt deal

The rise in stocks follows a budget stand-off in Washington

Investors on Wall Street shifted their focus from politics to profits today and liked what they saw, pushing the Standard & Poor's 500 index further into record territory.

Two days after Congress struck a last-minute deal to keep the US from a devastating default on its debt, investors were bidding up stocks on surprisingly good profits from companies in industries both old and new.

General Electric and Morgan Stanley rose after reporting higher earnings than financial analysts had expected. Google surged nearly 14%, topping 1,000 dollars a share for the first time.

"We've moved from the dysfunction of Washington to the reality of the global economy, and it looks pretty good," said Ron Florance, deputy chief investment officer at Wells Fargo Private Bank.

Investors were also encouraged by a rebound in Chinese economic growth in the latest quarter.

The rise in stocks follows a budget stand-off in Washington that kept hundreds of thousands of federal workers from their jobs for 16 days and could have forced the government to miss payments on its debt.

Congress agreed on Wednesday to fund the government and allow it to borrow through early next year.

The S&P 500 set a record for the second straight day. The broad index of 500 companies, up 22% this year, added 11.35 points, or 0.7%, to a record 1,744.50.

The gain this year is the index's best since 2009, when it began its bull run. Since its recession low in March of that year, the S&P 500 has soared 158%, driven largely by a rebound in earnings, a housing recovery, greater investor confidence and the economic stimulus programme by the Federal Reserve.

The Nasdaq composite was up 51.13 points, or 1.3%, at 3,914.28. The Dow Jones industrial average rose 28 points, or 0.2%, to 15,399.65, and is 277 points below its own record.

Christine Short, a senior manager at S&P Capital IQ, said investors are relieved that Washington pulled back from the abyss by extending the US borrowing authority until February 7, but she is not so sure how long the celebratory mood might last.

"We just bought ourselves a little more time, and the market seems to like that," she said. "But we're likely to go through the same cycle again in three months."

Another concern is earnings. Despite good reports from a few big companies today, the third-quarter reporting season has just started and most companies are not expected to post outstanding results.

Earnings for S&P 500 companies are expected to have grown 3.4% from a year earlier, the smallest quarterly increase in a year, according to S&P Capital IQ.

At the start of 2013, third-quarter earnings were expected to grow at nearly triple that pace.

What has driven stock prices up this year has not been earnings as much as investors' willingness to value them more.

At the start of the year, stock buyers were paying 14 dollars for every 1 dollar of S&P 500 earnings, according to S&P Capital IQ. Now, they are paying more than 16 dollars.

Investors will have a better idea of the US corporate profit picture next week when several big companies report results, including McDonalds on Monday, Boeing and Caterpillar on Wednesday and Ford on Thursday.

Google jumped 122.61 dollars to 1,011.41 dollars today. It reported a 36% jump in earnings after the stock market closed yesterday. An erosion in Google's ad pricing was more than offset by a big increase in the frequency of clicks on Google's ads.

AP

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