Bullish market mood remains as US earnings continue to reassure

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At the current index level of 5851 (time of writing) the FTSE 100 is now over 3% up in the last month and 13% higher than a year ago. The Dow Jones Industrials at 13,175 is close to its 52 week high of 13,339, and 7.8% higher than its 2011 closing value of 12,218.

The rally in the markets over the last few weeks has been driven both by encouraging earnings from the United States as well as reassurance from the European Central Bank that they would be unwilling to let the euro collapse – the so called “Draghi put” after the ECB President, Mario Draghi said that the ECB would intervene if necessary to protect Italy and Spain against soaring sovereign debt yields. In addition, strong jobs numbers from the US non-farm payrolls last Friday gives reason to believe that the US economy is in a relatively robust state. Low inflation numbers from China out today at just 1.8% also give investors some hope that China may well step in with further stimulus to boost growth.

According to FactSet, as of last week,  of the 389 companies that have reported earnings in the US to date for Q2 2012, 70% have reported earnings above the mean estimate, but just 43% have reported sales above the mean estimate. Companies have been cutting costs to beat profits estimates, but sales growth is harder to come by with the euro weakening and European growth is largely absent.

The blended earnings growth rate for Q2 2012 is 4.3%. The Financials (53.8%) sector is reporting the highest earnings growth rate for the quarter while the Energy (-22.6%) and Materials (-16.1%) sectors are reporting the lowest earnings growth rates. For the third quarter of 2012, 58 companies have issued negative guidance and 16 positive.

The current 12-Month forward P/E for the S&P 500 is 12.6. This P/E ratio is below the average forward 12-Month P/E ratio over the past 10 years (14.4). In other words, inexpensive versus historical norms.

How much further the markets have to go is questionable given underlying concerns about the euro zone. At the moment the focus is on corporate earnings, but this will quickly switch to macro economic news in coming weeks. With the FTSE and Dow well up in the last month, investors should begin to exercise caution.

Contrarian investor UK

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