Great Expectations Not Always So Great


Expectations for March-quarter results are running high, with both sales and profits for the S&P 500 Index expected to grow at year-to-year rates not seen in more than five years. While improved growth is undeniably good news, the high expectations could lead to disappointment.

Have stocks rallied too far given the still-sluggish pace of U.S. economic growth, especially if the outlook for tax reform has dimmed somewhat? That's one question investors will be looking to answer by tracking March-quarter results. Below are three others.

Has the long-awaited, oft-predicted correction finally arrived? Earnings-reporting seasons are often the catalyst for pullbacks, and many observers say a 5% to 10% decline in the averages is overdue. The Dow Industrials have not suffered a 5% pullback since February 2016, and their latest dip retraced less than one-fifth of the advance since June.

Still, the averages have a funny way of not doing what most observers expect. A move above the March 1 all-time closing highs of 21,115.55 in the Industrials and 9,593.95 in the Transports would reconfirm the bullish primary trend. While that would not preclude a correction, we'd view a rebound to new highs as a bullish near-term development — especially if broad market measures like the S&P 1500 advance-decline line also rebound to new highs.

Which sectors are poised to outperform? The "reflation" plays that led the market after the election — expected to benefit from faster economic growth and higher inflation and interest rates — have given way to new leadership. Technology and other growth stocks have led in recent trading, but March-quarter results could trigger more sector rotation. We'll be paying particular attention to the financials, as several big-name banks report in the first two weeks of earnings season.

What should I do with my portfolio? Focus on finding attractively valued shares of growing companies — not on big-picture themes like Trump plays versus growth stocks. Don't be afraid to buy stocks that have rallied on good earnings news. For now, our buy lists have more than 96% in stocks.

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