So Far, Earnings Look Solid

10/24/2016


The major averages have moved mostly sideways since Oct. 5, when the Dow Transports finally surpassed their April 20 high of 8,109.19. While we would have preferred to see an immediate upside breakout in the averages, we're still inclined to view the primary trend as bullish under the Dow Theory.

For now, we're looking for buying and selling opportunities one stock at a time while holding mostly invested portfolios. Our Buy List and Focus List have 87.6% in stocks, while our Long-Term Buy List has 83.6%. For all three lists, the remainder is in a short-term bond fund.

Financials in focus

While third-quarter earnings season is still young, early signs have been mostly positive. With about one-tenth of S&P 500 Index members having reported results, about 80% have exceeded consensus profit expectations and nearly 70% have topped consensus sales targets. Both those percentages exceed five-year norms.

As a result, Reuters now projects that per-share earnings for the S&P 500 Index will be up from year-earlier levels. Revenue is also expected to be up. If those forecasts prove to be accurate, it will mark the first quarter with both earnings and revenue growth since the fourth quarter of 2014.

Financials, the one S&P 500 sector with a meaningful number of quarterly reports already submitted, are now expected to report a 3.4% increase in per-share earnings, up from the 0.6% expected on Sept. 30, according to FactSet. Revenue for the financials sector is expected to be up 2.3%, versus the 1.6% expected on Sept. 30.

More important, the S&P 500 financials sector has rallied nearly 2% since Sept. 30, moving within 1.5% of the year-to-date high reached Sept. 2. The financials still rank among the worst sectors based on year-to-date returns and among the cheapest based on P/E ratio, so a breakout in the financials could have legs.

In addition to some decent earnings reports, the sector is benefiting from increased confidence that the economy has grown strong enough to handle an interest-rate hike from the Federal Reserve. Higher short-term interest rates would fatten banks' net interest margins.

Conclusion

With the Dow Theory in the bullish camp and the earnings picture improving, subscribers should maintain a mostly invested posture. Look for opportunities among attractively valued stocks supported by solid growth outlooks, and don't hesitate to buy such stocks after they rally on better-than-expected results. For new buying, attractive picks include Southwest Airlines ($42; LUV) and Zions Bancorp ($32; ZION).


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