Now for an Encore

And so the stock market finally pushed through the 900 mark. Now what will it do for an encore? It can hardly be expected to keep up the pace of last week, when it not only ran past the psychologically important milestone on the Dow-Jones industrial average but set new highs on all five trading days, ending the week at a historic 902.86. Where it goes from here depends on many things, of course, but an even more decisive role than usual is sure to be played by corporate profits. Unlike the grossly speculative markets of a few years back, the current market is an uncommonly sensible and solidly based one that has risen closely in line with rising corporate profits. Finding itself on a new and unfamiliar scale, it is almost certain to use the state of corporate profits in 1965 as the most reliable guide.

What's Good for G.M. The market advanced beyond 900 at precisely the time when U.S. businessmen reported some spectacular profits--and when President Johnson announced his in tention to help them to keep profits high and rising. General Motors' massive 1964 earnings of $1.735 billion after taxes were higher than any ever recorded by any company and greater than the gross national product of more than half of the world's nations. It was a testimony to the high gloss of U.S. business efficiency that G.M. managed to translate only a 3% gain in sales to a 9% gain in profit. In salute to this performance, G.M.'s stock rose 2 3/8 to 101 3/8, and rumors abounded that directors were considering a stock split.

Many other companies lifted profits appreciably faster than sales. Just about every major U.S. steelmaker set records: Bethlehem's profits rose 44%, Inland's 27%, Jones & Laughlin's 35%. In the oil industry, Jersey Standard, California Standard and Shell posted peak earnings. The long-depressed Pennsylvania Railroad and New York Central Railroad both increased their earnings by well over 100% in 1964, and the Southern Pacific earned more than any other U.S. railroad ever has--$95 million. Westinghouse's fourth quarter profits were triple those for 1963's last quarter.

Figures to Watch. Profits and stocks show every sign of doing still better in this year's first quarter. There is doubt about whether they can keep up the pace after that. Pessimists point to such profit-cutting possibilities as a steel strike and a fat rise in wages. One top Wall Streeter who predicted the 1962 market break six months in advance, Alan Greenspan of Townsend-Green-span, now says: "There will be a down trend in stocks by midyear, and the market at the end of 1965 will be well below where it is now." There are at least an equal number of bulls on Wall Street, and they got plenty of fodder from last week's economic indicators. Everything from machine-tool orders to construction contracts was on the rise, and auto sales--which were up 22% from a year ago--continued to surprise even the optimists. Corporate profits will be buoyed even further by this year's reduction in corporate taxes, from 50% to 48%.

As for stock prices, the figure to watch is the supremely important price-earnings ratio--the price of stocks cornpared with their per-share earnings. Stocks in the Dow-Jones index were selling at a precariously high 24-times-earnings just before the 1962 blackout, but the ratio has settled down to a steady and conservative 19.4-to-l in the past year. Average earnings of the Dow-Jones industrials this year are expected to edge above $50 per share. The bulls multiply that by 19.4 and come up with the conclusion that the Dow-Jones by year's end will approach 1,000. That is, at least, a nice round figure to aim at.

This file is automatically generated by a robot program, so reader's discretion is required.