Earnings Shoot Stock Market Higher

Wall Street hit highs last week, but what's really going on in the economy?

ByABC News
July 13, 2007, 4:27 PM

July 15, 2007 — -- Last week has been a banner one for Wall Street with the Dow Jones industrial average and the Standard & Poor's 500 both hitting new records. But not all economic news last week was good, especially if you are a tourist about to head overseas for vacation. The dollar hit an all-time low against the euro and is trading at a two-decade low against the British pound.

Yet it is just that bad currency news that is propelling Wall Street upward.

The cheap dollar is good for large American companies that do business abroad. Their products suddenly become cheaper, and they are able to sell more goods.

That bounce is being reflected in second-quarter earnings reports that started to roll in last week. Several of the earnings reports showed companies optimistic about earnings in the third quarter and beyond, signaling a possible strengthening of the economy.

The Dow closed Friday at 13,907 and the S&P 500 at 1,552 -- both records. The Nasdaq also closed up at 2,702 but did not break any records.

Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, said the rally is based on the earnings reports.

"The stock market is all about earnings," Johnson said. "Investors are starting to look beyond the second quarter and maybe beyond the third quarter."

It is large cap companies that have "led the parade," he said.

"They're happy that the dollar goes down, because the price of goods of services they produce get cheaper for consumers and businesses in other parts of the world," Johnson said.

Another factor driving the market: an amazingly high amount of cash available for investment or buyouts of public companies

The majority of that money comes from private equity firms, which seem to be gobbling up and taking private every publicly traded company. Almost every week there is another mega merger or acquisition announced, and most times private equity is behind the move.

"The levels of liquidity are very substantial," Johnson said.

There is plenty of bad economic news to worry about, but Wall Street seems to be ignoring it in favor of the earnings reports.