Broad Market At All-Time Highs

11/24/2014


While the major averages have moved mostly sideways since early November, the market's primary trend is unambiguously bullish. The Dow Industrials and Dow Transports reached all-time closing highs this month, as did broader indexes like the S&P 500 and Wilshire 5000. The S&P 1500 advance-decline line, a running daily total of advancing minus declining stocks, also reached new highs this month.

The market's strength reflects mostly solid U.S. economic reports, continuing good news on inflation, and a solid third-quarter earnings season. About 77% of S&P 500 companies exceeded consensus profit estimates for the quarter, the highest percentage since 2010, according to FactSet. More important, investors responded positively to the reports, with shares of companies exceeding expectations enjoying a bigger-than-usual bounce around their report dates.

Thomson Reuters says per-share profits for the S&P 500 Index were up 10.1% from the year-earlier period, better than the 6.4% projected on Oct. 1. Notably, the median S&P 500 company delivered profit growth in line with the capitalization-weighted index, as growth is no longer being led by the largest companies. In fact, median per-share-profit growth for the 50 largest S&P 500 companies was 9.1% in their most recent quarter, versus 9.7% for all S&P 500 companies.

Near-term profit estimates have moved lower since Oct. 1, but the consensus still projects profit growth of about 7% for the fourth quarter and 10% for full-year 2015. At 16 times expected year-ahead profits, the S&P 500 Index trades at premium to its 10-year average forward P/E of 14. Still, with inflation and bond yields unusually low, today's valuations seem unlikely to halt the market's advance — unless the profit outlook begins to deteriorate.

Our advice

Our three-part game plan is unchanged. Subscribers should watch the averages, hold nearly fully invested portfolios, and look for opportunities on a stock-by-stock basis. Our buy lists have 91% to 97% in stocks. For new buying, especially promising names include Jones Lang LaSalle ($142; JLL), Lam Research ($79; LRCX), and Shire ($208; SHPG).


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