FINANCIAL MARKETS : MARKETS: Corporate Profits Boost Stocks : Profit Reports Boost Stocks; Yields Climb

Strong corporate profit reports bolstered stock prices Wednesday, despite the drag of higher interest rates.

Closing to within 42 points of a record high, the Dow Jones industrial average rose 18.50 points to 3,936.04, reversing Tuesday’s 6-point loss and resuming a climb that added 3% last week.

The stock market initially weakened along with the bond market, where fear of inflation sent prices lower and interest rates higher. But bond yields retreated somewhat later, and Wall Street turned its attention to stronger-than-expected quarterly results from U.S. corporations.

Institutional Brokers Estimate System said that as of Wednesday, 57% of the companies it tracks reported third-quarter earnings that exceeded Wall Street average estimates.

“It’s just an accumulation of good corporate third-quarter earnings reports,” said Jack Shaughnessy, director of research at Advest. “That’s proving to be right now the overriding consideration.”

Analysts also tied Wednesday’s gains to computerized buying programs ahead of Friday’s options expirations.

Larry Rice, chief market strategist at Josephthal Lyon & Ross, cautioned that the surge in major indexes masked some underlying weaknesses. “Volume is up, but the fact of the matter is that the breadth is still poor, and it has been for a number of sessions,” he said.

In the broader market, rising issues edged out decliners by 1,131 to 1,029 on the New York Stock Exchange, where volume totaled 319.34 million shares, up from 259.74 million Tuesday.

Stocks headed lower at the open, along with bonds, after the government reported that while the nation’s trade deficit narrowed by $1.45 billion in August, Japanese imports to the United States surged to a record high.

“Both imports and exports were stronger,” said James Schroeder, MMS International market analyst. “That’s more an indication of continued economic strength and obviously would include both here and abroad.”

Bond prices often fall on data that show a robust economy, because they can foreshadow inflation.

Treasury bond yields continued to rise as the dollar fell while investors worried that a weaker U.S. currency would deter foreign investors from buying dollar-denominated securities.

Also hurting bond prices were inflation fears, fanned by a rise in daily commodity prices and remarks from a Federal Reserve official.

The Treasury’s main 30-year bond yield increased to 7.89% from Tuesday’s 7.86%, pushing its price down 1/4 point, or $2.50 per $1,000 in face value. Yields and prices move in opposite directions.

In the currency market, the dollar fell to within a yen of its all-time low against the Japanese yen after the U.S. government reported an unexpected widening of America’s trade deficit with Japan in August.

The British pound also rose sharply, advancing for a seventh-consecutive trading session. No specific set of data or news spurred the jump, but analysts said solid economic growth, low inflation and political stability in Britain has made sterling an attractive alternative for dollar sellers.

After falling in Asian dealings, the dollar slid further to close at 97.28 yen--a record-low close in U.S. trading--down from 97.75 yen Tuesday. The dollar also was changing hands in New York at 1.502 German marks, down from 1.5025.

Sterling, meanwhile, continued to advance against the dollar after breaking through a two-year high Monday. The pound has risen about 2.55% against the dollar this month and is up more than 9% from early this year. It closed at $1.623, up from $1.613, a third day of gains exceeding 1 cent.

Among the stock market highlights:

Computer-related stocks surged after Compaq and Digital Equipment reported improved quarterly results.

* Compaq rose 1 1/8 to 36 5/8 after the company said its third-quarter net income rose to 75 cents per share from 42 cents a year ago.

* Digital rose 1 7/8 to 31 1/4. The company narrowed its first-quarter net loss to 98 cents per share from $1.14 a year earlier.

* IBM added 1 to 75 3/8 as analysts anticipated a good third-quarter earnings report due Thursday.

* The strength in computer stocks spread to the over-the-counter market, where Intel rose 1 5/8 to 60, Lotus Development added 1 3/4 to 36 7/16, and Microsoft climbed 1 to 57 5/8. Computer stocks boosted the Nasdaq composite index, which is heavily weighted with technology stocks, by 5.81 points to 770.62.

Other major indexes gained as well. The NYSE composite rose 1.07 points to 258.32. The Standard & Poor’s 500-stock index rose 2.62 points to 470.28. The American Stock Exchange’s market value index rose 1.54 points to 458.26.

* Airline stocks rose as AMR gained 1 3/4 to 53 3/4. The parent company of American Airlines said its third-quarter net profit rose to $2.47 per share from $1.33.

* Adaptec gained 2-7/16 to 20-11/16 on strong earnings.

* Johnson & Johnson gained 1 3/8 to 54 1/2. Its third-quarter profit of 82 cents a share beat analysts’ forecasts.

* Amgen jumped 4-1/16 to 58 after the biotech company reported very strong earnings Tuesday.

Stocks were mostly lower abroad, with Tokyo’s Nikkei 225-share average falling 123.53 points lower at 19,868.87, while Frankfurt’s DAX average dropped 33.6 points to 2,051.16. In London, the Financial Times 100-share average closed 24.5 points lower at 3,060.8. In Mexico, however, the Bolsa index rose 25.08 points to 2,750.13.