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Market Outlook: Strong Earnings Give Stocks More Room to Rally

Topics:Earnings | Stock Market | Market Outlook

By: Phyllis Burke Goffney | 18 Apr 2007 | 05:34 PM ET

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The record close for the Dow Jones Industrial Average reflects unexpected strength in corporate earnings, which analysts say gives stocks more room to rally.

"We're in the middle of a sustained rally and its being driven by earnings as investors' worst fears have proven to be somewhat overblown," Frederic Dickson, chief market strategist at D.A. Davidson & Company, told CNBC.com. "Generally the market has shaken off the notion of going significantly lower, which is how some were feeling in February. There haven't been any major disappointments and if we close above the record that will raise investor spirits as well."

Although the technology sector saw weakness on Wednesday, the rally has generally been broad-based with the Dow utilities and S&P Midcap hitting historic highs this week and the S&P 500 trading at a six and a half-year high.

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"Two-thirds of the companies that have reported so far have beat earnings estimates and I'm a bit surprised," said Alan Skrainka, chief market strategist at Edward Jones. "The rally is being sustained by strong earnings and low interest rates."

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"I think it's a broad rally because there is a general desire to be exposed more to the stock market than other asset classes," said Michael Metz, chief investment strategist at Oppenheimer & Company. "The market is expensive, but everything else is more expensive. Anybody who buys long bonds is crazy and buying real estate is like trying to catch a falling knife."

If earnings season continues to be positive, the market advance could continue as well, analysts say, though there may be a few pullbacks along the way.

"I think we're going to see a stairstep reaction, then a little bit of consolidation as the market reassesses what the next wave of earnings will bring," said Dickson. "We're reasonably optimistic, but we will have some speedbumps along the way."

"I expect a lot of volatility going forward," said Andrew Siebert, senior portfolio manager at Stewart Capital. "But the market is good overall because the economy is strong and corporations have a lot of cash to spend."

"I think the broad-based buying may tend to fragment once the rally has run its course," said Metz. "So I wouldn't depend on overall momentum to redeem your mistakes. Sticking with big, high quality companies the benefit from growth overseas are your best bet."