The Fed speaks--a day for optimism on the U.S. economy?

01/26/2011 12:56 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Could that be optimism about the U.S. economy I see in the snow? (Yes, it’s snowing again here in New York City. It snowed yesterday too.) Sure looks like it with Standard & Poor’s 500 stock index opening up this morning.

The market is betting on positive verbiage out of the Federal Reserve today shortly after 2 p.m. Washington time. The consensus is that the Fed will increase its estimate for U.S. economic growth from the 3.3% projected at its November meeting while leaving the current program of quantitative easing in place to prevent any chance of a slip in growth of the kind that the United Kingdom announced yesterday. The U.K. economy contracted by 0.5% in the fourth quarter of 2010, the Office for National Statistics said. (The current Tory/Liberal government in London blamed the drop on the weather in November and December and vowed to stay the course on its program of budget austerity.)

In addition Wall Street hearts were set aflutter on data on new home sales for December released this morning that showed an increase to a 329,000 annual rate. That was a pickup from the 290,000 annualized rate of November and above the 300,000 economists had been projecting before the data. The record low annual rate was set in August at 274,000.

The big prize for the week comes on Friday with the release of fourth quarter GDP numbers. Economists are projecting that the economy grew at a 3.5% annual rate in the quarter after annual growth of 2.6% in the third quarter.

Some (maybe much) of this potential good news is already priced into the market. Yesterday the Standard & Poor’s 500 index closed within 0.3% of its pre-Lehman bankruptcy high from September 2008. Earnings for the S&P 500 companies climbed 30% in 2010, the fastest growth since 1995. That has kept the price-earnings ratio for the index from soaring into over-valued territory but multiples are still higher than they were back in June 2010. At that point, the price-to-earnings ratio on the S&P 500 stood at 12.7. The current ratio is 13.5.

Analysts are currently projecting that earnings for companies in the index will climb by 15% in 2011.

Good news starting today and continuing through Friday would push up those estimates and give investors more reason to bid U.S. stocks higher.

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