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Stock-Market Bulls: Focus on Earnings, not Europe

Sunday, 29 April 2012 03:03 PM

Investors should buy stocks because earnings have consistently surprised on the upside this season, which puts European uncertainty and tepid U.S. economic data on the backburner, some experts say.

Analysts had expected earnings to fall short this quarter, but companies like Apple, Expedia, Amazon.com, AT&T, 3M and many more have outperformed, making earnings the main driver in the market right now — more than the European debt crisis and lackluster U.S. economic data.

"Jobs are always important, but I still think the big story right now is earnings," says Ed Keon, managing director and portfolio manager at Prudential Financial’s Quantitative Management Associates, according to CNBC.

The U.S. economy added a net 120,000 jobs in March, and the Labor Department's April report — due out this coming Friday — is expected to be weak as well. Meanwhile, figures released last week showed gross domestic product grew only 2.2 percent in the first quarter, short of expectations for a 2.5 percent gain.

“A lot of people were really worked up about earnings a few weeks ago, and it looks like we’re getting (profit) growth of about 6 percent, when people were looking for about 2 percent," Keon says.

"You’re getting double digits out of industrials and technology, which may be an indicator that the economy is doing better than people think it is and better than the weaker GDP number would suggest.”

Fears have arisen that the European debt crisis is resurging in Spain, where yields in government bond auctions have been spiking. Still, turnout at auctions has been solid in Spain and elsewhere in Europe.

"If we can get any sort of relative calm out of the eurozone, I think we could trade higher," says Art Hogan of Lazard Capital Partners.

"We really do have a curious collection of crosscurrents, and yet the market is still creeping higher. That’s been the case the whole week. We’ve clearly hit a soft patch in the U.S. economy. That’s been the case for three weeks now," Hogan adds.

"Another piece of the puzzle is that the earnings season, which was supposed to be terrible, is much better than expected. But if our chief focus is major concerns about Spain, I think we’ll be choppy."

Other analysts also recognize the significant impact of earnings.

"By and large, earnings season has been positive and has proven to be an offset to the euro debt situation and to the mixed economic numbers of late," says Andre Bakhos, director of market analytics at Lek Securities in New York, according to Reuters.

Others took last week's weaker-than-expected GDP growth figures in stride.

"I don't think it is terribly surprising. We had been expecting something like this, something sub-2.5 percent growth," says Steven Baffico, chief executive at Four Wood Capital Partners in New York, according to Reuters.

"There's nothing catastrophic happening, this is just slow growth, and this underscores that the economy is on sound footing but nothing more."

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Sunday, 29 April 2012 03:03 PM
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