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Wall Street has recovered from its late-winter bout with the flu, brought on by a surfeit of unsold homes and bad mortgages. Lots of healthy things are happening around the world, and U.S. business is in the thick of it. The stock market now reflects this, so shares of powerful U.S. companies that excel around the world -- from Alcoa and Boeing to Coca-Cola and Yum! Brands (the parent company of KFC and Pizza Hut, among others) -- are hot. Global vigor, satisfactory first-quarter earnings, tremendous corporate cash flows and well-controlled inflation have lifted the fear that gripped the financial markets a few months ago.
As a result, stocks delivered solid gains in the first half of 2007. Through mid May, Standard & Poor's 500-stock index was up 6%. Expect the S&P 500 and the Dow Jones industrials to produce total returns of 10% to 12% for the year.
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Widespread vigor
Small-company stocks will find the going slower, but they won't crumble. Many small and midsize firms are worldwide winners, too. They benefit more than big companies from the fever to buy public companies and take them private because it's easier to buy them out.
The low point of a tough winter was February 27, when the Dow dropped 416 points, or 3.3%. The ostensible explanation was a mini crash in China. But the Chinese plunge came when U.S. companies were in limbo, with another month to sweat before they began posting earnings results. That made stocks vulnerable to bad news, such as higher mortgage delinquencies. Pessimists predicted that these mortgage woes would rage beyond subprime lenders, homebuilders and suppliers of building materials and lead to tighter credit availability in general, a nightmare for retailers, and a severe economic slump.
It's true that U.S. growth has slowed. For the quarter that ended in March, the economy grew just 1.3% in real, inflation-adjusted terms -- its weakest showing since the spring of 2003. But in April and May, the economy showed signs of recovery, led by manufacturing. And the earnings trend is good enough to allay fears. Through mid May, 77% of the S&P 500's stocks beat analysts' first-quarter profit forecasts. Gordon Fowler, who supervises $19 billion for Glenmede Investment Management, calls the mortgage issue "background noise" that won't harm his favorite sectors, energy and technology. Likewise, health care, business services, commercial real estate and most of manufacturing are safely distant from housing's woes. "I'm breathing a sigh of relief," says Doug Peta, a market strategist for J.W. Seligman & Co., who had been expecting more fallout from the mortgage mess. Peta now thinks the broad markets will end the year up 12%. That would take the Dow industrials to about 13,900, and the S&P 500 close to 1600.
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