Don't Stress About S&P 500 Earnings

 | Feb 25, 2014 | 3:00 PM EST  | Comments
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As of this point in earnings season, about two-thirds of S&P 500 companies have had positive earnings surprises. Rather than taking encouragement from that, I suspect that many are already searching for the black cloud inside that silver lining. 

I'm not going to provide a list of companies that beat and companies that missed. It's not important. Yes, some sectors do better at given times. Then they do worse. There's no predicting the order in which sectors fall in and out of favor. So the who's-who of earnings season can be interesting, in terms of which companies are doing well (or poorly) and why. But a list of winners is not really useful as a supermarket for investors to pick out what's fresh today.

As the S&P 500 treads on high ground, the calls for a correction are already under way. Yawn. What goes up must come down. But since corporate earnings are still going strong and the labor market shows no signs of tightening, the typical signals of recession are nowhere on the horizon.

But here's the real point: The S&P 500 is but one index. It's often incorrectly used as a benchmark by U.S. investors who have money in other asset classes, such as small-cap and value. Many investors key in on the S&P -- which is essentially a proxy for large-cap U.S. stocks -- as the only relevant index.

Let's set the record straight. The U.S. market cap, which includes all publicly traded stocks and bonds, accounts for about 46% of the world's total. Here in the U.S., we naturally have a home bias. In other words, we tend to overweight stocks from our own country. And there's good reason to do so. After all, the U.S. large-cap sector is a pretty solid performer overall, and we don't have to worry about the kind of political and economic stability we see in some emerging markets. (Repeating this for political alarmists and conspiracy theorists: We don't have to worry about the kind of political and economic stability we see in some emerging markets.)

The second-runner-ups are the U.K. and Japan, each with about 7% of the world's market cap. The much-ballyhooed China, home of every last item sold at Wal-Mart (WMT), clocks in with only 1% of world market cap.

Those are fun factoids. But don't lose sight of the real point. An investment portfolio should consist of the world, not simply U.S. large-caps and a smattering of smaller U.S. stocks. Why would anybody ignore 54% of the world's markets, simply because CNBC, Bloomberg and Fox Business don't obsess about those markets for hours on end?

By all means, invest in the S&P. But don't obsess about earnings reports of individual stocks, or even each uptick or downtick of the index itself. To save yourself some worry, allocate your investments across the world of opportunity, not limiting yourself to one asset class. 

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