Earnings Better Than Feared


U.S. stocks have responded positively to September-quarter results and expectations for monetary stimulus in Europe and China, pushing the Dow Industrials and S&P 500 Index within 3.5% of all-time highs. The Dow Transports have lagged behind but have not broken down, and the broad market has mostly participated in the rally.

Partly because we view the market's primary trend as bullish, we're looking to increase our equity exposure opportunistically. On average, stocks are not cheap and profit growth is weak, but we are still able to build a fairly diversified portfolio of reasonably valued growers.

After this week's addition of Jabil Circuit ($23; JBL), our buy lists have 79% to 80% in stocks and 20% to 21% in a short-term bond fund. Depending on the opportunities available in individual stocks, a near-term move to an equity exposure of 85% would not be surprising. For a move to a fully invested posture, we'd probably need to see better action from the Transports.

Third-quarter results

With both sales and per-share earnings for the S&P 500 Index expected to be down from year-earlier levels, it's hard to call third-quarter results good. Even excluding the energy sector's projected 65% year-to-year decline, per-share earnings for the S&P 500 Index are expected to be up less than 4%, according to FactSet. Sales are expected to be up about 2% excluding energy, says FactSet.

Even worse, forward guidance from companies has been mostly downbeat, and profit estimates for the fourth quarter are coming down faster than usual. Among the S&P 500's 10 major sectors, only the small telecom and utility sectors have not seen consensus fourth-quarter profit estimates cut since Sept. 30, according to FactSet.

However, the market's reaction to the third-quarter reports has been unequivocally positive. All 10 S&P 500 sectors have rallied since Sept. 30, with only the defensive utility sector up less than 5%. While quarterly results have not been the only factor driving the rally, it seems safe to conclude that results so far have been better than feared.


While a move to all-time highs in the Dow Industrials and S&P 500 would be bullish, we'd like to see the Transports get in gear before moving to a fully invested posture. For now, we're keeping 79% to 80% of our buy lists in stocks while looking for buying and selling opportunities on a stock-by-stock basis. Top picks for new buying include CDW ($45; CDW) and Jones Lang LaSalle ($164; JLL).

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