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Blue chips rally on earnings optimism

<font face="verdana" size="2"><p>Strong bank earnings pushed the Dow Jones industrial average and the Standard &amp; Poor’s 500-stock index to new 22-month highs Wednesday, but technology stocks lagged because of disappointing news from Lucent Technologies and Motorola.</p></font></p>
/ Source: The Associated Press

Strong bank earnings pushed the Dow Jones industrial average and the broader Standard & Poor’s 500-stock index to new 22-month highs Wednesday, but technology stocks lagged because of disappointing news from Lucent Technologies and Motorola.

With little market-moving news coming out of President Bush’s State of the Union address Tuesday night, analysts attributed the gains to upbeat quarterly profit reports, led by Dow 30 component J.P. Morgan Chase. Six weeks of advances in tech and telecommunications stocks prompted many investors to collect profits in those sectors.

The run-up in anticipation of good earnings reports has excited investors, but some are skeptical about whether the outlook for 2004 is robust enough to justify valuations, especially for tech stocks, said John Caldwell, chief investment strategist for McDonald Financial Group, part of Cleveland-based KeyCorp.

“Folks are getting away from their infatuation with tech stocks,” Caldwell said. “They’re looking more toward companies like J.P. Morgan & Chase, and why not? Not only did they just announce a big merger, but their earnings were substantially better than anticipated.”

The Dow industrials rose 94.96 points, or 0.9 percent, to close at 10,623.62. It was the highest close for the index of 30 actively-traded industrial stocks since March 19, 2002.

The market's broader gauges were mixed at Wednesday’s close. The Nasdaq composite index was down 5.53 points, or 0.3 percent, at 2,142.45, while the S&P 500 index was up 8.85 points, or 0.8 percent, at 1,147.62 — its highest close since March 22, 2002.

Much of Wednesday’s advance came late in the day. Earlier, earnings reports appeared to be motivating some investors to sell, said Todd Clark, head of listed equity trading at Wells Fargo Securities.

“Even some of the stocks that have had great results, like Merrill Lynch are down on profit taking,” Clark said. “Others are falling because of concerns about outlook.”

Overall, fourth-quarter earnings are expected to rise 20 percent, but that may not be enough to match investors’ heightened expectations. Still, most analysts remain bullish about equities over the long term.

“The market is sorting out a number of things,” said Kevin Caron, market strategist with Ryan, Beck & Co., LLC. “There’s a clear improvement in fundamentals, there’s clear improvement in valuations ... the market will find its own natural level.”

Also Wednesday, the Commerce Department reported a 1.7 percent increase in housing construction in December, making 2003 the best year for home builders in 25 years. The reading beat the estimates of analysts, who had forecast a 6 percent decline.

Strength in the housing market, fueled by low interest rates, has been a key support of the economic recovery. Analysts believe it will slow down somewhat this year.

J.P. Morgan Chase & Co. gained $1.01 to close at $40.10 after reporting profits of $1.86 billion, well above Wall Street’s estimates. Like other major banks reporting results in recent days, J.P. Morgan’s profits were boosted by improvements in both corporate and consumer credit as well as the rebounding stock market.

But Merrill Lynch & Co. lost 58 cents to $59.60, despite beating expectations for the fourth quarter and reporting its best-ever year of earnings. Revenues, which came in slightly below estimates, might have put off some investors.

Decliners included telecommunications manufacturer Lucent Technologies, which lost 33 cents to close at $4.42 after it reported profit results that beat expectations, but forecast future earnings to be flat to only slightly higher.

Motorola Inc. fell 24 cents to close at $16.81 after beating expectations with fourth-quarter earnings that nearly tripled last year’s results. But analysts were less than impressed by a 3 percent decline in cell phone sales.

There was also weakness in semiconductor stocks, with Advanced Micro Devices Inc. dropping $1.48 to close at $15.90. AMD posted its first profit in over two years after Tuesday's close and beat analysts' expectations, but said future sales could fall.

Advancing issues outnumbered decliners more than 3 to 2 on the New York Stock Exchange. Volume was at 1.76 billion, compared to 1.71 billion Tuesday. The Russell 2000 index, which tracks smaller company stocks, fell 0.50 point, or 0.1 percent, to 597.48.

Overseas, Japan’s Nikkei average finished 0.9 percent lower Wednesday. In Europe, France’s CAC-40 rose 0.4 percent, Britain’s FTSE 100 added 0.3 percent and Germany’s DAX gained 0.8 percent.