Market Stalls Amid Profit Gains


After moving within 1% of new highs on early March-quarter results, the Dow Industrials and S&P 500 Index have stalled during the second half of earnings-reporting season. The Dow Transports have drifted lower and now trade more than 5% from their March 1 all-time high of 9,593.95.

With closes above 9,593.95 in the Transports and 21,115.55 in the Industrials, the bullish primary trend would be reconfirmed under the Dow Theory. A failure to reach new highs in both averages would be discouraging, especially if followed by breakdowns below the lows reached in April.

While we remain bullish, we have increased our cash position because of several downgrades. Our Buy List and Focus List have 88.1% in stocks, while our Long-Term Buy List has 86.6%.

Favorable guidance

Early earnings reports appear to have raised the bar for companies with later release dates, leading to some disappointing share-price reactions. Still, overall March-quarter numbers remain impressive.

With more than 70% of S&P 500 members having reported, per-share earnings for the index are now expected to be up 14% from year-earlier levels, or 10% excluding the energy sector, according to Thomson Reuters. Revenue is expected to be up 7%, or 5% excluding energy. If those forecasts hold, it would be the best quarter for earnings and sales growth since 2011.

Nearly 75% of S&P 500 companies have exceeded consensus profit estimates, well above the long-term norm of 64%, says Thomson Reuters. Nearly 63% have exceeded consensus sales estimates, above the long-term norm of 59%.

Because of unusually favorable guidance, expectations for full-year earnings have increased since earnings season began — the first time that has happened so early in a year since 2012.

Consensus estimates now project 11.3% growth in per-share earnings for the S&P 500 Index in 2017, up from the 10.9% expected on April 1. Expectations for seven of the S&P 500's 11 sectors have increased since April 1.


Of course, the market's reaction is the best way to gauge the strength of an earnings season, and the strong results have not been enough to lift the major averages to all-time highs. The longer the market goes without new highs in both averages, the more uncertainty regarding the primary trend.

However, the market has risen since earnings season began, and our growth-at-a-good-price approach is working nicely this year. As we continue to look for buying opportunities on a stock-by-stock basis, our cash position may be reduced.

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