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battipaj@gruntal.com
gruntal.com
Monday, April 10, 2000
Weekly Perspective
Despite ongoing and strong underlying fundamentals, many short-term, leveraged, momentum investors were driven to the sideline as the selling climaxed last Tuesday afternoon. As the market turned from dismal to dysfunctional, the question asked by these investors was not "what" or "when" to sell, but "to whom?".
As the market moved rapidly toward it?s lowest levels Tuesday, fresh inflows from mutual funds sparked a rally and became the catalyst which moved the market higher straight through the end of the week. While Tuesday?s correction was certainly fast, deep and broad-based, the recovery was equally impressive and, in my opinion, confirms our belief that confidence is alive and well. For the week, the S&P 500, Dow 30 and NASDAQ composite returned 1.8%, 1.7% and ?2.7%, respectively. As we witnessed during other corrections in recent years, the liquidity and support from individuals and mutual fund investors provided the market?s true leadership in the end. The washout of some excess associated with highly leveraged, momentum investing may well prove to be one positive outcome from last week?s volatility.
Looking forward, I believe that a series of better than expected earnings reports will solidify and extend the market?s positive bias of late last week. As early as tonight, we expect Motorola to report earnings of $0.60 ? ahead of the street expectation of $0.58 according to our semiconductor analyst, Mona Eraiba. We believe this should begin a series of positive earnings releases expected during the next two to three weeks. It should be noted that the 12-month forward consensus earnings projection for the S&P 500 now stands at $60.02, up 1.2% for the month of March according to I/B/E/S. Add to this positive bias few pre-announced warnings and continued signs of macroeconomic expansion, I believe this reporting season will not only reveal a strong quarter past, but also reveal new insight and projections for future business levels and prompt further increases in earnings estimates. This acceleration in both actual and expected corporate earnings, further supported by a well-balanced and expanding macro-economy, should help U.S. equity markets move higher in the weeks and months ahead.
Also keep in mind that unlike last year, today?s outlook is no longer one of tentative recovery. Instead, the current outlook for earnings is for accelerating growth from an already solid base of economic activity. Viewed in aggregate for most U.S. corporations, unit volume growth, margins and balance sheet liquidity are generally improving and are at or near the high end of their historical range.
As I said before, and as was evidenced by my increased earnings estimates for the S&P 500, I believe that equity values will expand roughly in line with expected growth in earnings given that multiples have already expanded to account for many of the benefits of low inflation. Therefore, as we enter this first reporting season of the year, I remain optimistic and am not changing my recommended asset allocation (100% exposure to equities for growth oriented investors) or any of my year-end index targets - 12,500 on the Dow 30, 1,625 on the S&P 500 and 5,500 on the NASDAQ composite. |
