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updated 4/12/2004 1:36:29 PM ET 2004-04-12T17:36:29

Corporate America at last believes in the economic recovery, according to evidence from early returns in the first quarter earnings season. Sustained profit rises are encouraging executives to hire workers, increase advertising and order new equipment.

A Thomson Financial First Call report forecast a rise in year-on-year earnings for the S&P 500 of 20 percent, and perhaps 21-22 percent.

Wall Street has been bidding up stocks for more than a year, based on its belief in the recovery. But companies have been slow to show the same confidence. Last week there were disappointing results from Nokia and Alcoa, but overall the results were positive. Of the 38 S&P 500 companies that reported, 74 percent exceeded expectations.

Bellwether companies offered evidence that business spending was improving. Yahoo's results, for example, reflected a powerful rebound in online advertising, led by blue-chip clients. General Electric, whose 11 divisions touch almost all sectors of the economy, reported a 20 percent jump in orders.

Johnson & Johnson, Intel, IBM, Citigroup and Merrill Lynch are among the many companies releasing results this week, and they are expected to show the best growth since the first half of 2000.

Glimpses of the renewed enthusiasm came last week when the Conference Board, a research group, said confidence among its chief executives had jumped to a 20-year high and hiring intentions were the strongest on record. Michael Thompson, research director at Thomson Financial, said analysts predicted a 17.2 percent rise in first quarter profits but had been underestimating the turnaround. "Until recently, companies were relying heavily on bottom line growth through productivity gains rather than hiring people," he said. "Now, we are seeing top line sales growth and, hopefully, signs of heavy investment in sectors like technology."

After the rally of the past year, Wall Street is now the voice of caution. Tom McManus, chief equity strategist at Bank of America, said that while he had lifted his 2004 S&P 500 earnings forecast by $1 to $63, his perceptions of the market's valuation had not changed.

He and some other strategists worry that many of the factors fuelling the growth are unsustainable. For instance, rising oil prices would hinder earnings growth; the dollar appears to be stabilising after two years of decline, and interest rates are likely to rise after last month's robust payrolls report.

Copyright The Financial Times Ltd. All rights reserved.

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