Crucial Earnings Season Arrives

7/4/2011


The averages have found some support ahead of earnings-reporting season, helped by signs of progress in Greece's debt crisis. The reaction to near-term earnings news could prove telling, as moves above 12,810.54 in the Dow Industrials and 5,527.50 in the Dow Transports would reconfirm the bullish primary trend.

While a failed attempt at new highs would be discouraging, we are sticking with a mostly invested posture. Our growth-at-a-good-price approach is working, and quality growers are available at reasonable valuations. For now, our equity portfolios have about 10% to 15% in a short-term bond fund.

Broad-based profit growth

While every earnings season is crucial, the one beginning in the second week of this month promises to be a doozy, partly because expectations seem high:

• For the June quarter, consensus estimates project profits for the S&P 500 Index will be up 14% from year-earlier levels, with growth of at least 9% in all 10 sectors except health care, telecom, and utilities.

• For the September and December quarters, the consensus anticipates earnings for the S&P 500 Index will reach all-time highs, with year-to-year growth of more than 17% each quarter. All 10 sectors are expected to show growth in both quarters, except for a small third-quarter decline for the utility sector.

• Full-year 2011 earnings for the S&P 500 are expected to be up 17%, and a 13% increase is forecast for 2012. Revenue is expected to be up 10% for 2011, double the growth rate in 2010.

Encouragingly, revision trends heading into earnings season are favorable. Since April 1, profit estimates for the S&P 500 have increased for the June, September, and December quarters. Revenue estimates have also increased, partly because of better-than-expected sales in the March quarter.

As always, the market's reaction to the results and guidance provided by companies will reveal whether expectations have been met. With a rally above 12,810.54 in the Industrials and 5,527.50 in the Transports, the bullish primary trend would be reconfirmed under the Dow Theory. A failed attempt at new highs, followed by a breakdown below the lows established in the current correction, would be bearish.

Conclusion

For now, hold about 10% to 15% of your equity portfolio in a short-term bond fund. With the remainder, emphasize attractively valued stocks with high Quadrix scores, solid growth prospects, and the potential to exceed expectations. Among consumer names, Bed Bath & Beyond ($58; BBBY) is a top pick.


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