Profit, economic recovery key to stock rally

February 24 04:47 2016

Stocks kicked off the week in rally mode, building on its best week of the year. But for the bounce after a bruising start to the year to be sustainable, Wall Street pros say earnings growth has to pick up and the U.S. economy has to break out of its late-2015 doldrums and start growing at a peppier clip. Sure, the stock market is enjoying yet another “relief rally” after yet another “panic attack,” but the earnings picture has to improve for the rally to stick.635588057797852985-EPA-USA-NEW-YORK-STOCK-EXCHANGE-70583997

“The problem is that the earnings outlook is the most challenging it has been since the start of the bull market” back in early 2009, Ed Yardeni, chief investment strategist at Yardeni Research, said in a report. After rallying nearly 230 points Monday, the Dow Jones industrial average is pointing about 60 points lower in pre-market trading Tuesday.

The profit softness is visible in the statistics. Fourth-quarter 2015 profits for the S&P 500 stock index contracted for the second consecutive quarter and heading into the week were seen falling 3.8%, Thomson Reuters says. Profit estimates for the first and second quarters of 2016 also are negative. It’s not until the third quarter later this year that profit estimates turn positive. For now, Yardeni says, the stock rally is being driven by fewer recession worries, an oil rally amid talk of a freeze in crude production from major oil produceers, moves in China to stabilize its markets and hints from the Federal Reserve that another interest rate hike might be postponed.

But longer-term profits need to pick up if stocks can shake off its depressive start to 2016 for good, market pros say. “A long-term sustained stock market advance relies on earnings growth returning to levels strong enough to overcome the high valuation levels that have handicapped the market since … (late) 2014,” Bruce Bittles, chief investment strategist at R.W. Baird, said in a report.