Thus far, the 2011 earnings season has been decent for US companies. While only a small number (57, as of this writing) of the S&P500 have reported thus far, nearly 3/4 of them (73.6%) have beaten analysts' estimates. Before you say that the analysts have set the "bar" too low, consider the level of earnings at this point in the cycle. That level is higher than you might expect. Analysts project S&P500 operating earnings of $95 for 2011. With the S&P still trading below 1300, this equates to a P/E of less than 13.5 times, versus a long term average of 15.
Does this mean that the rally in US stocks has further to run? We'd prefer to conclude that valuations are supportive of current index levels. It will likely take further earnings advances to convince investors that breakeven levels are lower than before (thanks to aggressive cost cutting), and that companies can actually grow the top line (i.e., sales). Given that a disproportionate share of sales growth is coming from outside the US, we'd wager that top line growth will also surprise analysts for a while longer.
One positive to consider is recent "flow of funds" data. The mindless buying of bond funds has finally reversed itself, leaving stocks as a likely beneficiary of more inflows. For investors with longer time horizons, we continue to see high dividend shares as superior investments to most fixed income categories.
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