Upbeat earnings continue to outweigh mixed economic data and Europe concerns

published by T Rowe Price

Stocks moved higher as good earnings reports prevailed over investors' persistent worries about the European debt crisis, as well as some data suggesting a slowdown in the U.S. economic recovery. Markets started the week on a down note in reaction to a steep drop in European stocks, apparently prompted by the dissolution of the Dutch government over the weekend in response to dissatisfaction with austerity measures. Investors also seemed concerned about the strong showing of French socialist candidate François Hollande in the first round of the country's presidential voting. Some worry that Hollande will not cooperate with German Chancellor Angela Merkel in pushing through fiscal consolidation in the eurozone.

U.S. stocks regained their footing as the week progressed, thanks in large part to first-quarter earnings that have generally exceeded analysts' expectations-roughly three-fourths of the S&P 500 companies that have reported so far have topped estimates, according to Thomson Reuters. Strong showings in the technology sector provided a particular boost to the Nasdaq Composite Index.

The economic backdrop for corporate profits was mixed, however. Weekly jobless claims remained somewhat elevated for the second week in a row, suggesting that the sharp drop in claims earlier in the year may be ending. On Friday, the government announced that the U.S. economy had grown at an annual rate of 2.2% in the first quarter of 2012 versus 3.0% in the fourth quarter of 2011. The headline number masked stronger underlying data, however, according to our economists. "Core" growth measures, such as consumer spending and housing construction, enjoyed solid growth, while government spending fell sharply. Continued job and income growth remain critical for a self-sustained recovery, particularly given the headwind of fiscal policy uncertainty beyond 2012.

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Upbeat earnings continue to outweigh mixed economic data and Europe concerns

Stocks moved higher as good earnings reports prevailed over investors' persistent worries about the European debt crisis, as well as some data suggesting a slowdown in the U.S. economic recovery. Markets started the week on a down note in reaction to a steep drop in European stocks...

U.S. Stocks Gain as U.S. Economy Improves

The S&P 500 Index turned in its best quarterly performance since the third quarter of 2009 as the eurozone backed away from the point of collapse, the U.S. economy showed continued signs of life, and central banks pledged to step in and support global economic growth. Investors diverted assets from relatively safe but low-yielding bonds into riskier investments following last year's turmoil. Strong corporate earnings reports also bolstered U.S. equity returns.

Economic Environment: Unemployment Still High Despite Improvement

At the end of March, Federal Reserve Chairman Ben Bernanke said that the Fed's low interest rate policy is likely to remain in place a while longer to combat lingering problems in the labor market. The jobs market has been strengthening in recent months, but the unemployment rate is still high, and it may not fall much lower without stronger, sustainable economic growth.

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