Stocks Are Only Game In Town

Market Summary

On the heels of a tepid second-quarter growth report, the jobs data painted a rosier picture of the economy. Anything that really would suggest that the consumer is starting to step up and pick up a little bit more of the load would give you some optimism that maybe we can get an earnings break-out at some point," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio. "The consumer, in our mind, is a lever that could cause equities to trend higher," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis. "The most important takeaway from the positive jobs report is an indication of a sustained growth in the US economy." Stocks head into next week on a positive note, with the S&P 500 rising to a fresh intraday all-time high on Friday after two weeks of little change to the benchmark index.

Some market pundits are concerned about stock valuations and the crazy presidential election is having an impact, as well as headlines about the Dow Jones industrial average's recent seven-day drop. The S&P 500 is trading at 17.1 times earnings estimates of its component companies over the next 12 months, well above its average of 14.5 times over the past five years. Other analysts feel that the perceived lack of viable investment alternatives, economic growth and generally upward momentum in stock prices will result in higher stock prices over the next six months. "The US economy may not be going gangbusters but it remains the best equity alternative of any worldwide index," said Michael James, managing director of equity trading at Wedbush Securities. With about 85 percent of the overall S&P 500 already reported, second-quarter earnings are expected to have fallen 2.6 percent, not as dire as feared at the start of July. You can see in the graph below how technology shares continue to lead the charge higher. But also note the best trading opportunity might be financial stocks, which are surging on the expectation of a Fed rate increase.

By Gregory Clay

Investment Strategist

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gregoryclay@nellaadvisors.com

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