Patience Likely to Be Rewarded

S&P sees stronger-than-expected earnings boosting stocks and advises a greater equity allocation

By Joseph Lisanti

Back in 1860, it took 10 days to send a letter halfway across the continent by pony express. Now, with e-mail, people can send messages halfway around the world instantly. But faster isn't always better.

The availability of instant information spurs some people to act hastily. We believe the current earnings reporting season is a good example of this. Early in the season, traders drove down stocks when a major bank disappointed, and then pushed the market up the next day when a large technology company had better-than-expected earnings. While some undoubtedly made money on the back-and-forth moves, others simply got dizzy.

We prefer to take a somewhat longer view. From that perspective, things are looking up. Corporate earnings remain solid. About half of the companies in the S&P 500 have reported earnings for their most recent quarter, and results generally are better than expected. Standard & Poor's quantitative services group notes that if the remaining companies simply meet our analysts' expectations, operating earnings will come in with a double-digit year-over-year percentage gain for the 13th consecutive quarter. Even if the second quarter fails to make that target, earnings are looking fairly good: We project that operating earnings for the full year will be 75.39, a new record and 11.4% above the 2004 level.

The economy has been supportive, too. Inflation remains muted, and employment has been growing fairly steadily.

Despite high oil prices and ongoing terrorist activity, stocks have held up well. As a result, Standard & Poor's Investment Policy Committee has raised the yearend target price for the S&P 500 to 1270 from 1255.

Because of the higher target, we suggest that you increase your U.S. equity allocation to 50% from 45%, with those assets coming out of bonds. We now advocate 15% in foreign stocks, 20% in bonds, and 15% in cash.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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