Nomura Research sees stock market rally continuing as profits recover

Nov 6th 2009 - dailyfinance.com
http://www.dailyfinance.com/2009/11/06/nomuras-joseph-mezrich-sees-th...

Nomura's Joseph Mezrich sees market rally continuing as profits
recover

Bears who warn the U.S. stock market has gone too far too fast -- the
broad Standard & Poor's 500 index is up 18 percent year to date -- may
not get much vindication anytime soon. Investors should see stocks
continue to rally as long as corporate profits keep recovering, says
market expert Joseph Mezrich (pictured), Nomura Securities
International's head of quantitative research.

And the signs look good. The estimated earnings growth rate for the
Standard & Poor's 500 during the fourth quarter is 216 percent,
according to Thomson Reuters. Even stripping out the volatile
financial sector, the other eight out of nine sectors are expected to
show a blended growth rate of 7 percent. But that's still double the
3.5 percent economic growth of the U.S. economy in the third quarter.
And Mezrich says it's the fact that profit growth is outpacing the
U.S. economy that stocks have rallied ahead of an economic recovery.

"Earnings are growing far, far faster than the economy," says Mezrich,
speaking to reporters at the Nomura offices in New York on Thursday.
"You saw it in 2002, you saw it in 1991 and you're probably seeing
that now." Earnings growth typically follows an economic recession.
And the current situation sure supports that recent trend.

Seeing stocks recover losses is what's being being experience by major
investors, who are betting that the economic recovery taking shape in
the U.S. will be much stronger than is widely believed, DailyFinance's
Vishesh Kumar wrote Thursday. The growing bullishness among major
investors follows a wave of optimistic economic data that suggests
prior views of a muted recovery might be far too gloomy.

"Profits will grow faster than the economy," says Mezrich, who joined
Nomura in 2006 and previously worked at UBS and Morgan Stanley. "The
real question on how to gauge the performance of stocks is how profits
will perform." Mezrich typically looks at systematic factors such as
momentum, value and risk to explain market movements.

The Dow Jones Industrial Average was up 53 percent, while the the S&P
500 is up 58 percent through the close of trading Thursday since the
market hit its lows in March. "The March 9 rally was about risk coming
out of the market," Mezrich says. "This has been extremely painful for
many people. The market is coming back and likely will continue coming
back."

Investors should be enthused if they look back on the last recession
and recovery in 2002 and 2003, he says. "It took about a year for that
to turn around, but there was extraordinary profit growth."