U.S. Stocks' Third Hurdle Just Around the Corner

|
Includes: DIA, QQQ, SPY
by: John Tobey, CFA

The U.S. stock market has cleared its first two hurdles nicely. On the horizon is the third.

As June ended, with the U.S. stock market down from its April highs, I thought it faced three hurdles to rebuild its base and regain investor interest (see “This Stock Market Decline Is Painful” – July 2). Since then it has cleared two, and the Dow Jones Industrial Average is up 11% through Monday, September 20 (excluding dividends).

Here’s the hurdle checklist:

Second quarter earnings reports (mainly, mid-July to mid-August) – Results: Large majority of companies exceeded forecasts (see “U.S. Stocks Clearing Their First Hurdle” – July 27)

Wall Street’s post-Labor Day shift to 2011 forecasts (early September) – Results: Market has steadily risen since Wall Streeters returned from vacation (see “Why Wall Street Might Spur a Bull Market in 2011” – September 7)

___ Third quarter earnings reports (mainly, mid-October to mid-November)

Why the focus on earnings? Although economic and other reports can influence investors for a short time, a company’s stock price is based primarily on the company’s fundamentals – forecast earnings, in particular. Because the market sold off beginning in April, already good valuations became very attractive. They then reached the point where the improving estimated earnings overwhelmed the negativity, pulling stock prices upward.

Good time to step back

Whenever there is high uncertainty and widely differing opinions about the stock market, it’s important to have a sensible perspective. One way is to remove ourselves from the short-term moves and remember where we have come from and why. Here is the picture.

So… U.S. stock market investing appears to be regaining its footing. Importantly, there is more return to be had between today’s valuations and “normal” levels. The coming third hurdle (good earnings reports) could start such a move.




Disclosure: U.S. stocks and stock funds