Hot S&P 500 Defies Lower EPS Forecasts

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Earnings expectations for Q4 are falling but stock prices (SPY - News) keep rising. Will it continue?

In October, analysts lowered Q4 2013 EPS estimates for the S&P 500 by 1.5%, yet the index rose 4.5% for the month. Odd as it may seem, this particular trend has consistently repeated itself.  

FactSet notes:

"In recent quarters, it has not been unusual. In fact, it has occurred in seven of the past nine quarters (including Q4 2013). During these seven quarters, the average decrease in the bottom-up EPS has been 2.6%, while the average increase in the value of the index has been 4.7%."

Among the 460 companies within the S&P 500 that have reported Q3 earnings, 75% have beaten profit estimates, according to Bloomberg.

Still, there have been some disappointments.

In the retail sector (XLP - News), Wal-Mart beat profit estimates by a penny, but total revenue was up just 1.7% from a year ago and the company gave a weak outlook for Q4.

For previous quarters this year, here's how Wal-Mart's earnings reports have looked:

Q1: Wal-Mart Misses Revenue, Guides Below Expectations: Weather Among Factors Blamed

Q2: Wal-Mart Misses, Guides Below Expectations; Blames Weak Consumer Spending, Payroll Tax, FX And Lack Of Inflation

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When industry blue chips like Wal-Mart report poor results, it could spell trouble ahead for the rest of the retail sector. 

Performance wise, Wal-Mart's stock has badly underperformed its peer group, the Consumer Staples Sector SPDR (XLP), by almost 15% over the past year alone and by a whopping 37% over the past five years.

Comparing the performance of individual stocks versus their peer industry group and the ETF's tracking them is one easy way to see whether a stock is a leader or a laggard. 

Similarly, Cisco Systems Inc. (CSCO - News) has badly lagged its peer group, the Technology Sector SPDR (XLK - News). Over the past five years, Cisco's stock price has risen just 58% compared to a 147% gain for S&P technology stocks (XLK). Cisco is the world's largest maker of computer-networking equipment and the company is forecasting its first quarterly sales decline in four years.

On a valuation basis, the S&P 500's (^GSPC) current price-to-earnings ratio (P/E) is 19.67 using trailing twelve month "as reported" earnings. That's slightly above its historical median of 14.51.

"The expectation of continued monetary accommodation has trumped economic fundamentals to become the main factor determining the near-term outlook for U.S. equities," said Scott Minerd, Global CIO at Guggenheim Partners.

The ETF Profit Strategy Newsletter uses technical, fundamental, sentiment analysis along with market history and common sense to keep investors on the right side of the market. 74% of our weekly ETF picks have been winners, year-to-date through the end of the third quarter.

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