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Summary of the September Zacks Market Strategy Report

In September and October, it’s a “forward look” to a 2013 earnings world.

Top-down S&P 500 earnings from ZRS indicate our top-down models are pessimistic, saying S&P 500 earnings will be up +5% in 2012 and may grow +3% to +7% in 2013 versus bottom-up consensus near +12%.

Top-Down S&P 500 End-Of-Year Targets by Zacks In-House Strategists...

We believe that holding or raising new S&P 500 highs above 1470 is possible, but it is also possible we are in a range-bound market until a firm resolution of ‘fiscal cliff’ issues. 1390-1400 is our low end.

In late September, some Zacks experts think equity markets have reached a phase when stocks stall out, and investors move money from one group to another, creating big winners and big losers.  The very next day they switch places.  Some days, a stock gets crushed and investors can’t figure out why. The next day the same stock is zooming higher while the market is flat.  Don’t look for logic or a trend that can be traded.  There are-head fakes during these times. Stay focused on fundamentals, which means rising earnings estimates and attractive valuations.

S&P 500?  We view the S&P 500 as a balanced global index, where 45% of company revenues are earned abroad.  With Europe’s economy in a shallow recession and growth slowing in China, the remaining 55% of U.S. earnings raises the outlook for the U.S. S&P 500 above foreign indexes with heavier international exposure.  Macro risks are less within the massive U.S.A. economy at this moment.  We like large cap U.S. stocks.  

DJIA? Ditto the S&P story.  

NASDAQ?  We like the IT sector long-term.  But we keep the NASDAQ-100 at a market perform at the moment, as foreign revenue growth and domestic business spending on IT have slowed considerably.  We would add to a position here, though among stronger growing IT companies who have recently beaten estimates.  Apple keeps things interesting and keeps the index up.

Zacks Large Cap/Small Cap Style Boxes show a “Muddle Through” stock-pickers regime lingering.  Faster growing, richly priced, and smaller market cap companies offer investors higher expected returns.  But the market isn’t buying it. Instead, investors have bid up quality large cap value and blend stocks. However, a contrarian view here may be the right one.

Finally, how do you find a successful investment opportunity by tracking industry trends?  In debates, we at Zacks note a firm consensus for a steady "Muddle Through Economy." That’s misleading.  Inside a +2% GDP growth rate, industry trends churn this economy. And inside an economy’s churn, broad opportunities and equally broad risks exist for any investor.

Zacks strategists have positioned their investors on bullish opportunities. Picks from individual strategists in Homebuilders (XHB), Financials (PNC - Analyst Report), Energy (ERX - ETF report) and Utilities-Water (AWK - Snapshot Report) are just a few.  But be equally aware, churn includes significant downside risks.  

Here are five industry trends to think about:

(1) Momentum in U.S. housing markets helps the Financials sector and Home Construction industries the most.  

For Zacks Rank industries, we see strong earnings ranks tied to Housing such as Home Furnishing-Appliance, Real Estate, Construction-Building Services, Banks-Major and Banks &Thrifts.

(2) Rising oil prices mostly help the Energy sector.

For Zacks Rank industries, we see strength in Oil-Misc., Pipelines and Drilling.  Also, we see a strong Zacks Rank for Energy-Alternative Sources.

We see Zacks Rank weakness in Airlines, Oil & Gas-Integrated and Coal.

(3) Fiscal Cliff.  Coming tax sunsets could raise U.S. personal income tax rates, or impose sequestration that cuts spending.  This appears to hurt the Industrials and IT sectors the most.

We have seen weakness in capital goods spending and hiring across all business sectors.  For a Zacks Rank example, a weak Misc.Tech industry is now apparent.

(4) The U.S. drought has negative effects on the upstream Consumer Staples sector in such industries as Food Distributors and Packaged Foods, who must pass on the higher input prices.

We see strength in Zacks Rank downstream industries like Utilities-Water, Ag. Products, Fertilizers, and Ag. Chemicals.

(5) China slowdown shows up in weakness in Steel and Metals-non-Ferrous.

Happy Investing!

READ THE FULL MARKET STRATEGY REPORT by clicking here: New Top-Down Targets for 2012

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