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Monday, July 7, 2014

Time for Earnings Season Will Disappointments Come...And Would it Even Matter For the Markets

As the WSJ reports in an article with the headline 

Time for U.S. Firms to Earn Stock Investors' Faith

Some Say Revenues and Profits Must Accelerate to Sustain Rally

...we are entering “earnings season” for reports of second quarter earnings of corporations with projected earnings at very high levels:
The Dow Jones Industrial Average broke through 17000 for the first time ever last week, powered by an upbeat jobs report that was the latest in a string of strong U.S. economic indicators. That helped cement investors' view that the weakness caused by severe weather in the first quarter was behind them.
Now, with stocks trading at their highest levels in seven years when compared with expected earnings, some investors say corporate revenue and profits need to accelerate to sustain the rally, especially as the Federal Reserve continues to pare back stimulus measures
To be sure, some investors still consider valuations to be stretched despite selloffs in some corners of the stock market in recent months. The S&P 500 is trading at 15.7 times its expected earnings for the next 12 months, the highest since July
The article cites some favorites among fund managers
Mr. Luttrell is holding on to so-called growth stocks such as Facebook Inc., FB -1.46% PCLN +0.23%  and Google Inc. GOOGL -0.32%  that sold off steeply in March and April amid concerns that the shares were overvalued. Valuations of these stocks have fallen to reasonable levels, and they could start to look more attractive if those companies report strong earnings, he said.
Another manager in the article  cites Kroger and Netflix as his top holdings,
Kroger's second-quarter profits are expected to rise 1.7%, and Netflix's are forecast to more than triple
Tough to consider most of the above as deep value stocks...and their earnings are certainly subject to a fair amount of variance vs expectatons/forecasts.
Good earnings reports are needed to justify current valuations…and the Fed is at the end of its easing cycle….does that equal a positive outlook for a further rally??
Price may eventually return to value, high current returns historically are followed by historically low returns…but also research indicates there is a momentum factor to financial markets….
That is why forecasts of near term market performance is near impossible

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