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The following is an excerpt from Zacks Chief Strategist John Blank’s full Aug Market Strategy report. To access the full PDF, click here.

In Zacks August Market Strategy report, I get critical about the second quarter earnings season.

Is 9.4% annualized earnings growth out of line? Is the present S&P 500 forward 12-month valuation of 17.7 out of line?

There are many ways to answer these two questions. What if I just focus on the prior 2 business cycles, 1992 to 2000 and 2001 to 2007? That makes for 16 years of the most recent data.

That most-recent business cycle comparison offers up this relative perspective--

  • Earnings Per Share (EPS) growth looks very similar to the average of that 16-year period (+10.9% annually over the 16 years vs. +9.4% now).
  • The average P/E was a sky-high 24.1, vs. the current valuation of 17.7.

In summary, this short analysis doesn’t make me fear current S&P 500 circumstances. It makes it appear reasonable, instead.

Zacks Sector/Industry/Company -- August Telescope

Strength — across the board -- in the earnings reports in the second quarter is evident in the high number of Very Attractive Sectors in the month of August.

Info Tech, Consumer Discretionary and Consumer Staples, Industrials, Health Care (5 of 10 sectors) -- all of these are Very Attractive. And Materials is Attractive. This is remarkable, and something I haven’t seen in some time.

But reading broadly, it is confirmed. This is the story of this earnings season. The earnings beats are coming in very strong. They are falling into every sector we separate out and look at.

(1) Info Tech maintains its Very Attractive rating. It is the Semis (no surprise) and Computer-Software-Services leading the charge now. Misc. Tech also helps the sector.

Zacks #1 Rank (STRONG BUY) Stock Pick: Micron Technology (MU - Free Report)

Micron Technology, Inc. has established itself as one of the leading worldwide providers of semiconductor memory solutions.
 
(2) Consumer Discretionary stays Very Attractive. The industry leaders are Home Furnishing-Appliance (very best of all), Autos/Tires/Trucks and Other Consumer Discretionary.

Zacks #1 Rank (STRONG BUY) Stock Pick: Electrolux AB (ELUXY - Free Report)
 

Electrolux AB manufactures appliances and outdoor and industrial products: vacuum cleaners and other floor care machines, sewing machines, chain saws, lawn mowers, weed eaters, aluminum extrusions, conveyor systems and archive systems, and recycles scrap metals and waste paper. Products are sold in Europe, North America and Asia.
 
(3) Health Care is back to a traditional Very Attractive rating. The leader is Medical Care again.
 
Zacks #1 Rank (STRONG BUY) Stock Pick: Fresenius SE & Co.
 
Fresenius SE & Co is a Bad Homburg, Germany health care company. It offers products and services for dialysis, hospitals and outpatient treatment.
 
The company's business segments consist of:

  • Fresenius Medical Care is engaged in treating with chronic kidney failure
  • Fresenius Helios is a hospital operator
  • Fresenius Kabi supplies essential drugs, clinical nutrition products, medical devices and services and
  • Fresenius Vamed plans, develops and manages healthcare facilities.

 
(4) Industrials
have risen convincingly to Very Attractive. The strongest plays: Machinery, Machinery-Electrical, Airlines, Railroads, Business Services & Aerospace-Defense.

(5) Consumer Staples is a new Very Attractive call. Soaps & Cosmetics and Food lead the way, but Beverages and Consumer Products-Misc. Staples looks good too.

(6) Materials stay Attractive. Chemicals and Paper are spots to play. Metals-Non-ferrous looks terrible again, but iron ore prices started rising, so Steel is up.

(7) Financials keep a Market Weight. Banks-Major and Investment Banking & Brokering looks very solid now.

(8) Telco Services stay a Market Weight.

(9) Utilities get to a Market Weight. Utilities-Gas Distribution is a new strength.

(10) Energy stays Very Unattractive. Coal, Exploration & Production, and the big Integrated Companies are all in the tank.

A Closing Note: In July, the FOMC also provided additional details concerning the process to normalize the Federal Reserve’s balance sheet.

The Committee intends to gradually reduce Federal Reserve securities holdings by decreasing its reinvestment of principal and proceeds from its System Open Market Account securities, only reinvesting proceeds when they exceed specific monthly caps.

These caps will be set initially at low levels then gradually raised in a predictable manner, in order to limit the increased supply of assets to the private sector each month.

The following is an excerpt from Zacks Chief Strategist John Blank’s full Aug Market Strategy report. To access the full PDF, click here.




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