Home sales bump, earnings send stock market higher

NEW YORK – On a day that brought both good and bad news about the economy, investors chose to see the glass as half-full.

U.S. stocks edged higher Thursday, pushed up by a batch of bright earnings reports and encouraging news about home sales. In the fight for investors' attention, those upbeat signs muscled out a disappointing report on unemployment claims, mixed results on European markets and weakness at big-name companies like Aetna, UPS and Dow Chemical.

The Dow Jones industrial average rose 113.90 points to 13,204.62. The Standard & Poor's 500 climbed 9.29 points to 1,399.98. The index momentarily flitted above 1,400 in the late afternoon, its first foray past that psychological barrier in three weeks. The Nasdaq composite index rose 20.98 points to 3,050.61.

The National Association of Realtors reported that the number of contracts to buy homes is rising, which pushed up the stocks of home builders like PulteGroup and Lennar. Companies like Lockheed Martin, the aerospace and defense contractor, and Starwood Hotels, which runs chains including Westin and Sheraton, climbed after beating analysts' predictions for first-quarter earnings. Amazon.com rose 1.6 percent during the trading day, then reported much-higher-than-expected earnings after the close. Its stock blasted nearly 14 percent higher around 5 p.m.

Still, investors didn't need to look far to find problems, or at least confusion, looming on the horizon.

In the U.S., the government reported that the number of people seeking unemployment benefits was little changed last week, stoking more uncertainty about when and if companies will return to pre-recession levels of hiring.

John De Clue, global investment strategist at U.S. Bank's wealth management business in Minneapolis, was watching the yield on 10-year Italian bonds tick up. That means the Italian government is paying more to persuade investors to hold its bonds, a sign that investors are worried about Italy's ability to repay its debts.

De Clue described the situation in Europe as "two steps forward and one step back."

"Okay, the situation doesn't look as serious as it did back in October," De Clue said. "But it's very difficult to understand what the market looks like with the need for austerity but also the need to avoid a recession."

But Doug Cote, chief market strategist at ING Investment Management in New York, thinks concerns about Europe are overblown. Though the debt crisis isn't solved, he said, the European Central Bank has set up enough safeguards to keep Europe's problems from spilling across the ocean for the near future.

"There's breathing room," Cote said. "I think they get it done no matter what happens with French elections, no matter if the Dutch government dissolves. This is way overplayed."

European markets were mixed. Stock indexes rose in Germany and Britain but fell in Greece, Spain and France. Spain's Banco Santander reported that it set aside more money to cover bad loans, heightening concerns that Spain could join Greece, Ireland and Portugal in asking for a bailout.

U.S. companies' earnings reports also underscored the European problem. Dow Chemical, the nation's largest chemical maker, and UPS, the package delivery company, both fell after citing a cooling down of business in Europe.

Despite those declines, first-quarter earnings reports have been mostly positive. Of the roughly 200 companies on the S&P 500 that have reported earnings, about 80 percent have beat analysts' forecasts, according to calculations by John Butters, senior earnings analyst at the financial data provider FactSet. That's better than the past four quarters, which averaged about 72 percent, he said.

Earnings growth has also come in better than expected. Four weeks ago, analysts had expected year-over-year earnings growth of about 0.1 percent. So far, companies have turned in about 5.9 percent.

To be sure, much of the growth is being driven by a few giant companies. Strip Apple out of the S&P 500, and earnings growth would drop to 3.6 percent, Butters calculates. And banks, which have also turned in strong first-quarter earnings, were helped by one-time items like accounting adjustments.

The past four weeks have been helter-skelter for the market, with indexes waffling between gains and losses. The three major indexes are up for the week so far but down for the second quarter, which started at the beginning of April.

It's a contrast to the relative gaiety of the first three months of the year, when the market charged higher as investors shrugged off the previous year's concerns about Europe and gridlock in Washington over fiscal policy. Now, some of those worries appear to be resurfacing.

Natalie Trunow, chief investment officer of stocks at Calvert Investments in Bethesda, Md., said investors will probably continue to be cautious until they have more clarity on those and other issues.

"We have an election coming up, we have the expiration of the Bush tax cuts and payroll breaks, we have the budget negotiations coming up soon," Trunow said. "All of this is going to give markets indigestion."