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The Week Ahead: What Do Stocks Know That We Don’t?

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By Tom Hudson

stock_market_data(MCT)—Welcome back, 2007. Remember the house-flipping, the easy mortgages and job-hopping? Well, those days are over, but the stock market is back to levels last seen five years ago.

Now many Americans are struggling with underwater mortgages, banks have set almost impossibly high home-lending standards, and millions of workers have simply given up looking for a job out of discouragement. So what’s changed since 2007?

Corporate profits have changed. Really changed. After-tax corporate profits are at record levels, totaling almost $2 trillion. That’s a 40 percent increase in five years. Since 2007, companies first focused on cutting costs to survive. Then they concentrated on growing their businesses in ways that didn’t require significant investment. As sales have rebounded from the depths of the recession, companies have seen those dollars drop to their bottom lines.

Five years ago, the companies in the S&P 500 stock index earned almost $83 dollars per share. This year those companies are expected to earn more than $112 dollars per share. In the meantime, investors are paying the same price to own a piece of those profits. One very real impact is the average 401(k) retirement account balance has climbed to new highs.

So this week, with the S&P 500 hovering around a five-year high, it may make a run after its all-time high from October 2007. But while the price level may be similar, what investors are buying is very different.

Tom Hudson is anchor and managing editor of “Nightly Business Report,” produced by NBR Worldwide and distributed nationally by American Public Television.

©2013 The Miami Herald
Distributed by MCT Information Services

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