A Rally Good Earnings Season

 | Oct 28, 2011 | 9:45 AM EDT
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This earnings season was supposed to be a straight-up stinker, and ditto for the forward-looking commentary from the ivory corporate towers. The recent global macro headlines, while being apparent in the financials of companies, have not meaningfully derailed anything. What we are witnessing is a classic case of oversold conditions in August (hindsight is always 20/20) being met with information that is completely contrary to the market consensus. Yes, insight into Greece's bond haircut and how the European Union plans to address contagion risk has helped to alleviate jitters, leaving Congress's Super Committee discussions and the possibility of no more split U.S credit ratings as the last potential bombs to explode inside the markets for the year. This rally is fundamentally driven, a function of subsiding EU fears.

A Look-See into Earnings

All sectors except for telecom have surpassed earnings expectations by a surprise score in excess of 50%. Consumer discretionary landed an early win with 70% of companies reporting beating estimates, fourth behind industrials, healthcare and utilities. The sector's numbers and commentary should be a jolt of caffeine to those still on the sidelines.

For example, Coach (COH) had a 9.2% same-store store sales increase fueled by a strong gain in conversion, with foot traffic generally flat. Online was more robust than stores, and pricing power was called out as a factor in the quarter's performance. Coach's China business is approaching $300 million in annual revenues, towards the high end of a prior outlook, and contrary to those who predicted a hard landing for the country.

Columbia Sportswear (COLM) zoomed past consensus earnings by $0.38 a share, a clean upside print, as the Europe, Middle East and Africa region flourished. Even Office Depot's (ODP) disappointing same-store sales could be brushed aside given the profit margins of each division, as promotional tactics were scaled back during back-to-school season. The dip in the savings rate and subsequent boost to third-quarter consumption is displaying itself so far in consumer-discretionary, third-quarter earnings. The question is, is it sustainable?

Indeed, this week and month will be memorable. Roughly 94% of S&P 500 stocks are trading above the 50-day moving average and the index headed towards its most robust rally since October 1974. As confirmation of the near-term sticking power of the gains, the S&P 500 has also eclipsed its 200-day moving average, after generally holding the lows in early September.

Stocks Are Back in Fashion

There are three components behind the renewed interest in stocks. First, Europe has stepped to the plate, once again, with something instead of sitting idle. Is the bailout a grand plan? No, but it didn't have to be at this particular moment because the market just wanted bullet points to latch onto, knowing full well that implementation will not happen overnight.

Second, corporate sales and earnings are not only holding firm amid all the hoopla, but the growth rates and surprise scores are strong from standalone perspectives.

Finally, U.S. data has cooled concerns of a mini-recession and, in the process, has lifted hope for 2012, when additional fiscal stimulus of some form will be present to go alongside an overly accommodative Federal Reserve (interest rates to 2013!).

These facts, coupled with the disbelief that what went down in October was real (those still short or underweight will be lured in), has raised the prospects for further stock gains going into the year's end.

There, I said it. My fingers and toes are crossed, though.

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