Tis the Season to Be Jolly…Earnings Season!

All the fun starts tonight after the closing bell as the first company will announce Q4 ’10 earnings results!  Time flies!   A quick historical scan of equity market performance during the fourth quarter shows that the markets are typically flat or down for this period.  The markets have had a run lately, so it’s possible we see more of the same behavior during this announcement season.  Regardless, everyone has high hopes for earnings.

According to an article written by Kopin Tan in Barron’s over the weekend, only 21% of the equity managers out there beat the S&P 500!  WOW!  Additionally, he points out that the S&P 500 has not closed below its 50-day moving average in more than 4 months.  That has not happened since 2003.  Additionally, we have now seen the Dow Jones Industrial Average (DJIA) post a positive return for the 6^th straight week in a row.

The equity markets we track were all up last week.  The DJIA gained 0.84% last week to finish at 11,675, the S&P 500 Index gained 1.10% to end at 1,272, and the Nasdaq Composite Index gained 1.90% to finish at 2,703.  The Russell 2000 index, which tracks the performance of small capitalization stocks, gained 0.52% to finish at 788.

Analysts are expecting earnings in the 4Q of 2010 to increase about 32% from 4Q of 2009 and for revenue to increase 7.5%.  It seems like we write the same thing every quarter about corporate earnings – we are much more interested in revenue increases than earnings increases.  This is because, although it’s great to see companies making more money from cutting costs, it is much more important to see sales growing.  Additionally, when revenue grows after costs have been cut as much as they have over the past 2 years, much of that sales growth drops right down into profit.  You will hear it referred to as the “coiled spring.”

We suspect we will see the best revenue growth in the sectors we remain over-weighted in – specifically the technology and consumer discretionary sectors.

We still have a positive outlook on the equity markets and are over-weight the small and mid cap space and the technology sector.  We are still looking at investments in areas OTHER THAN bonds for fixed income allocations.

Call us for help or if you have any questions.

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.