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Reason for optimism as markets energized by Wells Fargo earnings

The spring rally on stock markets shows no signs of abating after a shot of good earnings news from the battered American banking sector energized investors at the end of last week.

The spring rally on stock markets shows no signs of abating after a shot of good earnings news from the battered American banking sector energized investors at the end of last week.

Wells Fargo & Co. said last week it expects record first-quarter earnings of $3 billion US, easily surpassing analysts’ estimates.

It was welcome news for investors who were disappointed at the start to the U.S. earnings reporting season when aluminum company Alcoa Inc. reported a larger than expected $497-million loss.

But Wells Fargo was the first financial company to give an indication of first-quarter performance and it was welcome news coming ahead of earnings from Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. this week.

The burst of enthusiasm at the bank’s news helped stretch the rally that began March 10 — on good earnings news from Citigroup — to a fifth week, leaving the main TSX index up 21.4 per cent since that date and the Dow Jones industrials up 23 per cent.

Despite the strong performance, analysts caution against reading too much into this rally.

For one thing, “the key is that the current flow of news is coming against a backdrop of extreme misery,” said John Johnston, chief strategist of the Harbour Group at RBC Dominion Securities.

“Expectations have been very low and now you’re getting some favourable surprises off some very low numbers,” he said.

He also pointed out that first-quarter earnings expectations were very, very low.

 
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