An unexpected gain in fourth-quarter U.S. gross domestic product and news that the Federal Reserve has stopped cutting interest rates for now are giving many analysts hope that the recession is finally at an end. But David Bowers, Merrill Lynch’s chief investment strategist, continues to question whether an economic recovery will translate into a quick jump in corporate revenues and profits–and continued gains in stock prices.
Bowers believes that following a grim fall, the U.S. could “get some great growth numbers” in the second and third quarters. But “the real question is, ‘Are we going to see a V-shaped turnaround in [profit] margins,’” he says in an interview. “The pressure is on now for the U.S. to prove it can deliver the earnings. And are we going to get top-line sales growth?”
Bowers says he is concerned that many market analysts still expect earnings per share to grow by a robust 15% annually over the next five years. But this forecast may hinge on a number of constellations being in proper alignment. For one thing, he asks, will the U.S. continue to be able to attract capital from abroad if it persists in running both current account and budget deficits? Will U.S. capital spending recover without a strong rebound in corporate profits? And will the developed world be able to exit from recession if Japan cannot finally climb out of its own economic malaise?