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Tally it up, and financial analysts see earnings for the S&P 500 rising 12 percent in the last three months of the year, a big jump from an estimated 4.8 percent gain in the first three months. There's plenty of reason for caution, though. For starters, analysts tend to overestimate earnings several quarters in the future, and may be doing that again. Early last year, they expected a 13-percent jump in earnings in the last three months of the year. They got four percent instead. And some experts believe Wall Street is underestimating how much the sweeping federal spending cuts that kicked in March 1 are going to slow the economy as government workers are furloughed and contractors lose business. If they're right, that could erode earnings. Investors also have to keep on eye overseas. Half of revenues at big U.S. companies are abroad and some key economies are slowing or contracting. This can hit stocks hard, as General Electric shows. Last month, when GE reported a 17 percent fall in revenue from Europe, its stock dropped four percent in a day. Many European countries are mired in recession, and the outlook has only gotten worse. Unemployment in the eurozone just rose to an all-time high of 12.1 percent. China has put investors on edge, too. On April 15, news that it grew more slowly than expected in the first three month of this year helped push the Dow down 266 points, the biggest drop for the year. Nervous yet? One thing to keep in mind is that big, sustained drops in stocks -- ones that end bull markets
-- are most often caused by U.S. recessions, and that doesn't appear likely soon. Four of the past five bull markets ended as investors dumped stocks before the start of a recession. They sold stocks two months before the start of the Great Recession in December 2007 and a year before the March 2001 recession. The U.S. economy has grown between 1-2.5 percent in the past three years. That's pitiful compared with the long-term average of 3 percent. Still, it's growth.
LOW INTEREST RATES: If recessions cause stocks to plummet, what causes recessions? In most cases it's the Federal Reserve raising short-term interest rates because it fears high inflation from an overheated economy. Fed hikes were the trigger for three of the past four recessions. But today, the greater fear is too little inflation, not too much. The Fed's preferred measure of inflation rose only 1 percent in the year through March. The Fed's target is 2 percent. What's more, the Fed has said it would keep key short-term rates nearly zero until unemployment falls to at least 6.5 percent. It is 7.5 percent now.
[Associated
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