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Does the stock market upswing mean we are out of the woods?

July 29, 2009 by  

Does the stock market upswing mean we are out of the woods? A recent stock market rally fueled by better than expected earnings has had commentators predict the end of the current financial troubles, but some analysts caution against excessive optimism.

Surprisingly strong quarterly earnings and growing opposition to a massive government spending bill caused a more than 11 percent increase in the major indices in the course of just two weeks from July 13 to July 24, one of the largest in history.

However, some economist suggests that the rally may not last or herald a more sustained recovery as the vast majority of positive earnings results stem from cost cutting and workforce trimming.

"[Y]ou can’t keep on shrinking your way to profitability," says Steven Ricchiuto, chief economist at Mizuo Securities USA, quoted by a CNN business blog.

"Eventually, you do damage to your end users," he adds. "You have to get revenues up to have a sustainable upturn."

In fact, for many companies even while earnings have risen, actual revenues have gone down, indicating a persisting weakness in demand.

Ultimately as long as unemployment remains high, squeezing wallets and consumer confidence, any stock market rally will be temporary, analysts believe.
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