Optimism on Earnings Spurs Stocks, Capping Big Week; Dow Up 112

Blue chip stocks rallied Friday, capping their best week since July, as investors turned their attention to third-quarter earnings reports that are expected to show the fastest growth in more than four years.

The Dow Jones industrial average climbed 112.71 points, or 1.1%, to 10,649.76. The broader Standard & Poor’s 500 index rose 1.4%, with stocks in the drug, retail, airline, Internet and banking sectors, among others, contributing to the gains.

The Nasdaq composite added 0.9% to 2,886.57, lifting the technology-oriented index to within a point of its Sept. 10 closing record.

Although the broader market was mixed, analysts were heartened that Wall Street largely shook off a strong September employment report that suggested the Federal Reserve might raise interest rates sooner than later.

Stocks rebounded from an early decline, helped in part by a relatively calm bond market.

The yield on the bellwether 30-year Treasury bond just inched up to 6.19% from 6.18% on Thursday despite the labor report.

Fed policymakers left rates unchanged at their meeting Tuesday but said they would raise them again if the economy’s growth continues to accelerate. The Federal Open Market Committee meets to review interest rate policy Nov. 16.

“The market had to make a decision whether they thought the jobs report was going to push the Federal Reserve over the edge” and decide to raise interest rates again, said Hugh Johnson, chief investment officer at First Albany Corp. “The answer was no, and that helped get the market going again.”

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Stocks have been rallying since the Fed signed off Tuesday. Analysts said investors may now be focusing on expectations for strong third-quarter corporate earnings as those reports begin to pour out starting next week.

“There is optimism afoot that earnings are going to be good,” said Robert Morris, director of equity investments at Lord Abbett & Co.

Companies in the S&P; 500 are expected to report profit growth of 19.4%, on average, for the third quarter, the best since the second quarter of 1995, according to First Call/Thomson Financial.

Major companies scheduled to post earnings next week include Intel, Pfizer, Merrill Lynch and AlliedSignal.

For the week, the Dow gained 3.7%, the S&P; 500 rose 4.2% and the Nasdaq gained 5.5%.

The three major indexes notched their biggest gains since the week ended July 2, when the Fed first raised interest rates this year.

Lower oil prices on Friday also may have aided stocks. Likewise, the dollar continued to inch higher against the Japanese yen.

Despite Friday’s gains in blue chip indexes, however, losers narrowly outnumbered winners on the New York Stock Exchange, though winners had the edge on Nasdaq.

And small-stock indexes mostly ended lower. The S&P; small-cap 600 index eased 0.4%. The S&P; mid-cap index tumbled 2.9%.

Nonetheless, some analysts were encouraged by the broadening of investor interest this week to include such beaten-down groups as drugs, airlines and banks.

“I think the market has bottomed and the psychology has changed. All in all, this is the best the market has looked in two to three months,” said Barry Hyman, senior market strategist at Ehrenkrantz King Nussbaum.

In commodity trading, meanwhile, gold gave back some of its recent gains, with near-term futures falling $2.60 to $320.20 an ounce. For the week gold was up nearly $17 an ounce.

In foreign trading, Mexican stocks gained 1.9%, helped by Wall Street’s rise.

Among Friday’s highlights:

* Drug stocks posted big gains on optimism that proposed federal legislation could increase prescription availability under health-care plans.

Merck surged $2.88 to $73.75 and Johnson & Johnson leaped $4.50 to $98.75.

But in the biotech sector, Biogen fell $3.75 to $84.31 after an analyst at Salomon Smith Barney downgraded the stock to “outperform” from “buy,” citing concerns over the company’s upcoming litigation with Chiron over an alleged patent infringement.

Also, Genentech plunged $15.06 to $157.75 after the biotech company’s controlling shareholder, Roche Holding, said it will sell more than a fifth of its stake in a share-and-bond offering that could raise $4.8 billion.

* Retail stocks were led by Wal-Mart, which rocketed $4.06 to a record $55.38. Other gainers included Dayton Hudson, up $3.69 to $68.69; Nordstrom, up $1.13 to $29.19; and Home Depot, up $2.25 to $74.50.

* Internet stocks, the leaders of the recent rally, continued to surge. America Online jumped $3.31 to $121.81, EToys rose $4.25 to $82.50 and Inktomi jumped $7.13 to $129.88.

Also, 24/7 Media surged $6.88 to $47.38 amid speculation on the Web that the company is in talks to be acquired by DoubleClick, another Internet advertising company, for $1.5 billion. The report came from the Silicon Alley Reporter Web site.

* Among Net-related new stock issues, the buying frenzy continued: San Mateo-based E-Stamp (ticker symbol: ESTM), which lets customers print postage from their computers, jumped $5.38 to $22.38, giving the company a market value of $1.25 billion.

Rival Stamps.com, which went public last summer, fell $2.19 to $33.56.

Among other IPOs, Sunnyvale-based Interwoven (IWOV), which develops software to manage Web sites, soared $24 to $41. New York-based Jupiter Communications (JPTR), which provides research on Internet commerce, surged $14.50 to $35.50.

* Airline shares rose as oil prices fell. A major part of an airline’s cost structure is fuel costs.

Delta rose $1.63 to $54.31 and US Airways rose $1.25 to $32.75.

* Nasdaq’s gain was aided by Global Crossing, which rose $4.31 to $36.50 on speculation BellSouth or Germany’s Deutsche Telekom might try to buy it after they lost bids for other telecommunications companies. The shares have gained 39% in the last three days. BellSouth rose 63 cents to $43.25.

Also, Qualcomm rebounded $13.38 to a new high of $213.94.

* Some bigger tech names pulled back. IBM, which helped drag down the Dow on Thursday, fell another $2.88 to $113.50 even though Credit Suisse First Boston reiterated its “buy” rating on the stock, saying the recent sell-off “has been overdone.”

And Xerox plummeted $10.25 to $32.50 after warning that third-quarter earnings would be lower than analysts’ expectations.

Other losers included Unisys, down $2.13 to $43.69; and National Semiconductor, down $1.69 to $31.13.

* Charles Schwab lost $2.19 to $33.56 and Merrill Lynch declined $1.44 to $68.56 after being downgraded by Morgan Stanley Dean Witter.

Market Roundup, C5