July 14, 2007 in Business

Market’s drop based on reason

Joe Bel Bruno Associated Press

NEW YORK – Wall Street’s stunning reversal this past week – going from a nearly 150-point drop in the Dow industrials Tuesday to an astonishing 283-point surge two days later – looks like a rally without reason.

Painful as that drop Tuesday was, it made sense. Earnings warnings from the likes of Home Depot Inc., Sears Holdings Corp., and homebuilder D.R. Horton Inc. sent stocks tumbling and frayed investor confidence.

But little – if anything – had changed when stocks thundered higher, carrying the Dow and Standard & Poor’s 500 indexes to new closing records. The outlook for second-quarter earnings reports, which won’t start in earnest until the coming week, was still quite uncertain, making that huge rally a little hard to explain.

Some analysts say the advance had nothing to do with investors’ expectations for earnings, and call it a case of panic buying, where investors buy simply so they won’t be left on the sidelines. That led them to overlook the bad news of the week, and not worry about what the next few weeks might bring.

But that leaves critical questions to be answered: Just what does the market expect from earnings season? Projections for the second quarter indicate that profits increased at a slower pace due to rising interest rates globally, and the continued drag from troubled areas like the housing and automobile sectors.

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