The “Heat Map”

November 26th, 2014

Most of the time the U.S. stock market looks to 3 factors (call them the “pillars” that support the stock market) to support its upward trend – let’s grade each of the pillars.

CONSUMER SPENDING: We grade this factor to A- (very favorable)

THE FED AND ITS POLICIES: We continue to grade this factor an A+ (extremely favorable) because the FED cannot do much more than it is doing to support the stock market and asset prices.

BUSINESS PROFITABILITY: This factor’s grade is a B+ (above average). We are coming to the end of the third quarter earnings season. As reported by FactSet, 487 companies from the S&P 500 have reported to date and 77% have reported earnings above the mean estimate. The blended earnings growth rate is 7.9%, telecom services reporting the most improved growth for the quarter while consumer discretionary is the only sector to report a year-over-year decline. On a valuation basis, the current forward 12-month price to earnings ratio is 16.0. The 5-year average price to earnings ratio is 13.5, 10-year average 14.1, and 15-year average is 16.2. We are by no means undervalued, but the markets are not overvalued. Continued earnings growth can support price multiple expansion moving forward.

OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in good shape ASSUMING no international crisis. We have added the risk of an EBOLA pandemic to the “powder keg” in the Middle East to the situations to be watched. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these collectively as a 2. Risks continue to lurk, and they deserve our ongoing attention.

NOTE: there is no change from the previous Weekly Commentary.

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