It's been a memorable ride this year in the stock market, not the least in July as the play between mergers and subprime risk made for big swings. This report will take a quick look at the stock market and corporate profits from the 2002 economic expansion through June 30, the closing date of the second quarter. Earnings for the second quarter, though mostly better than expected, are still on the thin side. But thin is relative. For the inflation-minded Federal Reserve and interest-rate sensitive bond market, mid single-digit year-on-year profit growth is probably just about right. But for the stock market, where share price appreciation is in the high teens, thin is just that -- thin.

First Call, which tracks S&P 500 earnings, pegs year-on-year profit growth at about 6 percent for the second quarter. The graph above tracks First Call's data when profit growth first started to appear in early 2002 and at the same time as the economy was coming out of the 2001 recession. The long subsequent streak of double-digit percentage growth ended with the fourth quarter last year, but Wall Street analysts, another group tracked by First Call, are expecting a return to double digits beginning next year. Of course Wall Street can sometimes be too optimistic, as it was at Y2K.

Speaking of optimism, the above graph compares the dark green bars of the first graph against the light green bars of year-on-year change in the S&P 500 index. Through the course of the graph from left to right, the S&P 500 seems to lag profits, showing steep declines at the far left as profits were beginning to rise and sagging in the middle even as profits held firm and steady. If the stock market is indeed ahead of the game, it doesn't show in this graph. During the last three quarters the stock market, after lagging profits in the prior 10 quarters, is now exceeding profits, especially in the second quarter where the S&P 500 posted a year-on-year gain of more than 18 percent.

The above graph, a comparison of total corporate profits against the S&P, helps keep things in perspective. Whatever degree of exuberance there may be in today's market it clearly can't compare with the "irrational exuberance" bubble on the left. This, along with the estimates for future profits, can offer comfort to the bolder spirits.

The final graph below offers at least one factor behind the stock market's strong growth. Foreign demand for U.S. stocks has suddenly popped higher. These are data from the monthly Treasury International Capital report, which is posted at the middle of the month. The new gains reflect foreign appetite for risk. Foreigners, when they invest in the U.S. financial markets, have in the past favored lower risk securities, including corporate bonds and especially Treasuries.

Bottom line

Reading company reports and listening to related webcasts is very important for the investor. A main theme from second-quarter statements is that global demand is strong, especially from the developing economies of Russia, India and Latin America -- not to mention China. Companies are giving much lower scores to domestic demand. Global demand is good for exporters, which in this country are concentrated in the capital goods sector, not consumer goods. The best description for demand overall is mixed and steady, which is a poor description for the stock market where superlatives are the rule.