The Sector That’s Behind the
Decent Stock Market Action

By

inflation rateThe earnings outlook is decent, but modest. According to analysts, earnings outlooks aren’t going up, so why then is the stock market ticking higher? Likely because of reasonable valuations and the fact that no other asset class offers income and the potential for capital gains. It’s a low interest rate environment and the bond market has run its course. Real estate requires a very long-term time horizon for capital gains (although there is potential for rental income) and commodities are always unpredictable and volatile. No, the stock market is moving higher because there are no other places for institutional and individual investors to put their money with the opportunity to generate a rate of return greater than the inflation rate. This is why the stock market is likely to keep ticking higher over the very near term, even with a humble earnings outlook.

With a modest earnings performance in the fourth quarter of 2011, the technology sector and the NASDAQ continue to outperform the rest of the stock market. I’ve been very surprised by this strength and the sector’s mediocre earning outlook. It’s actually quite a bullish sign. The NASDAQ has so far returned about 13% for the year, while the Dow Jones Industrial Average has returned six percent (excluding dividends). Big names like Intel Corporation (NASDAQ/INTC), Microsoft Corporation (NASDAQ/MSFT) and Cisco Systems, Inc. (NASDAQ/CSCO) are all doing great in this stock market; trading right at their 52-week highs with dividends. It’s by no means a bullish stock market, but it’s a definitely a worthy breakout.

As I say, the earnings outlook is modest. In fact, a lot of Wall Street research analysts have been lowering their earnings outlooks for the third and fourth quarters, as well as for 2013. It makes me think that the stock market is going to experience some major bumps after the Presidential election, if not before. In any event, I still wouldn’t be loading up on an index fund. It remains a stock-pickers’ market and, because economic growth in mature economies is so stagnant, earnings outlooks could change on a dime. We’ll be in for some big corporate surprises later this year. (See Choppy Trading Action Here to Stay—It’s an Index Trader’s Paradise.)

Large American corporations (not including the big banks) are very well-positioned to deal with changes in the global economy. They were already lean going into the subprime mortgage crisis and emerged with a self-imposed austerity that has improved balance sheets tremendously. While earnings outlooks and investor sentiment changes, the health of U.S. corporations keeps getting better. In my mind, this partially explains the dramatic move in share prices at the beginning of the year. Institutional investors just decided to buy stocks. They didn’t wait for fourth-quarter earning season or revised earnings outlooks. They were tired of worrying about the debt crisis in Europe. It really didn’t have a lot to do with the known fundamentals.

The NASDAQ is the leader in this stock market. The Dow Jones Transportation Average has to play some catch up or its divergence will signal an imminent correction.

Special: Military's "6th Branch" to Create 22,000 Millionaires Again? The military is mobilizing a new "6th Branch"—one unlike anything seen since World War II. The last time this happened, it minted 22,000 millionaires in just a few short years. Now history is repeating itself. The Pentagon is quietly unleashing $65 billion for this buildup... Using history as a guide, investors could see earth-shattering gains of up to 23,586%...enough to turn every $10,000 into $2,358,600 on just a single play. In fact, our investigation found the Pentagon's "6th Branch" buildup could already be minting new millionaires. So if you're looking to retire rich in the next few years...starting with very little money...you'll need to move quickly, before these stocks really take off and the opportunity is over. Take action while there's still time;Click here to get started now.

About the Author, Browse Mitchell Clark's Articles

Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »

×