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Get ready for a bigger Santa Claus rally: Strategist

Lawrence Lewitinn
·Lawrence Lewitinn

It turns out the third quarter of 2015 may not have been so bad—and the end of the year may see a larger-than-expected “Santa Claus” rally, according to one market strategist.

With more than half of the S&P 500’s (^GSPC) companies reporting earnings, over 70% have bested expectations, said Erin Gibbs, chief equity investment officer at S&P Capital IQ Global Markets Intelligence. Though slightly below the 75% that beat the Street in the second quarter, the current level is in line with the long-term average, notes Gibbs.

Courtesy of Erin Gibbs, S&P Capital IQ
Courtesy of Erin Gibbs, S&P Capital IQ

Of the 10 sectors in the S&P 500, a few are standing out. “The big winners so far to date

are telecom, health care, and consumer staples,” said Gibbs. Those sectors reported more beats a percentage of their total companies than the overall index. The laggards include energy and utilities, which saw more misses than beats this past quarter.

Courtesy of Erin Gibbs, S&P Capital IQ.
Courtesy of Erin Gibbs, S&P Capital IQ.

Although third-quarter earnings reported thus far show a decline from last year, the size of that drop is not as steep as first reported. In mid-October, earnings for S&P 500 companies were coming in at a 5% decline from Q3 2014. But now that drop is only 2.6%.

“There might be potential for the quarter ending flat or maybe slightly negative,” said Gibbs, who is responsible for more than $16 billion in assets under advisory, “but certainly nothing as bad as -5%.”

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She is also positive for the end of the year based on the S&P 500’s 8% gains in October.

“We looked at what happens when we have a big rally in October,” said Gibbs. “We found that on years where October is up over 5%, November and December end up being even higher than normal, with an average of 5.5%.”

Courtesy of Erin Gibbs, S&P Capital IQ.
Courtesy of Erin Gibbs, S&P Capital IQ.

That’s a bit ahead of the 25-year average return of 3.8% for the S&P 500 in the combined months of November and December.

“The end of the year may be quite positive,” said Gibbs.

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