Focus Shifts To Earnings

7/6/2015


The major U.S. averages have dipped amid back-and-forth headlines on Greece, generally solid reports on the U.S. economy, and rampant takeover activity. While the Dow Industrials and S&P 500 Index are less than 3.5% from all-time highs, both are also within 4% of the closing lows reached in January.

A breakdown below the Jan. 30 closing low of 17,164.95 on the Dow Industrials would represent a bear-market signal under the Dow Theory, as the Dow Transports are in a clear downtrend. In fact, because of continued weakness in railroads and truckers, the Transports are now more than 13% from 9,217.44, the all-time high reached in December 2014.

A close above 9,217.44 is necessary for a reconfirmation of the bullish primary trend. But the Dow Theory will remain in the bullish camp until proved otherwise, and our growth-at-a-good-price approach is working nicely. For now, we have about 85% of our buy lists in stocks.

Earnings expectations

In a relatively slow period for financial news, the debt problems of Greece have dominated recent headlines. That will change in mid-July, when June-quarter earnings season gets rolling. Consensus estimates project per-share earnings for the S&P 500 Index will be down 4.5% from the year-earlier quarter, according to FactSet.

History suggests actual results will exceed current expectations. But investors are keenly interested in whether S&P 500 Index earnings will be down for the first time since 2012 — and whether consensus expectations of a return to year-to-year earnings growth in the December quarter are realistic.

For our money, a more interesting question is whether we'll be able to find enough reasonably valued growers to build a diversified portfolio. On that question there are grounds for optimism. Excluding a 60% expected profit decline in the energy sector, per-share earnings for the S&P 500 Index are expected to be up 2.1%, says FactSet. That suggests actual earnings excluding the energy sector will be up 4% to 7%.

Growth among U.S.-centric companies should be even better. Including only companies that generate more than 50% of sales inside the U.S., per-share earnings for the S&P 500 Index excluding energy are forecast to be up 5.9% for the June quarter, according to FactSet.

Conclusion

The reaction to June-quarter results will be crucial. For now, with reasonably valued growers available, we're maintaining a mostly invested posture. For new buying, Comcast ($62; CMCSa) and Jones Lang LaSalle ($173; JLL) are top picks.


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