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Earnings Season Gets Solid Marks, but Market Reaction Is Confusing


The market appears driven more by a rotation of money into equities versus a fundamental valuation rally.

So far, with S&P 500 (INDEXSP:.INX) earnings season more than two-thirds complete, the season is likely going to be labeled a modest success – emphasis on the word modest.

According to FactSet (you can read the report here), through February 8, 72% of the companies that reported beat the mean estimate for their EPS number. That compares very closely to the average of 69% beating for the last four quarters.

Perhaps more impressively, 67% of companies have exceeded the sales estimates in the quarter compared to the analyst estimates. In the last two quarters, this was only 41% and the average for the last four quarters is 50%.

On the surface, this sales metric would seem really positive. But we have to remind ourselves that many estimates were revised downward last quarter on weak guidance. In addition, while total revenue grew 3.8% so far, if you remove Prudential (NYSE:PRU) alone, the growth rate was 2.4%, according to FactSet. The expectation on December 31 was for 2.2% growth. So, not a significant increase – but at least the increases are hitting many more companies than normal.

Overall, according to S&P, the total operating EPS for 2012 is expected to be less than 1% higher than the actual operating EPS from 2011. When you consider all of this, you can see why we would call this earnings season so far only a modest success. After all, the last quarter provided a lot of forward skepticism on corporate earnings, but the numbers seem to be stabilizing.

So, while corporate earnings look to be stabilizing on very small growth, the markets have rallied in the new year. The rally has started to flatten but is still trending up. We are up 7% in the new year.

The question to ask yourself is, does the market look like it is getting ahead of earnings? I would say the market rally does look a little heated – and driven more by a rotation of money to equities, versus a fundamental valuation rally.

I'm not ready to exit this market yet – but I wouldn't be invested without protection, either. Get your protection in place -- especially while volatility is at historical lows.
No positions in stocks mentioned.
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