The market continues to “melt up†despite the first projected quarterly year-over-year decline of S&P 500 earnings happening in many years. This “profit recession†should continue for the second quarter as well as the current consensus has second quarter earnings also being down from the same period a year ago. As concerning is that first quarter GDP growth forecasts have moved down to just over 1% annually from the 3% level that was the consensus to begin 2015.
Some of this recent rally can be attributed to early quarterly results stepping over a lowered bar as analysts have been driving down their earnings estimates for months now. This is a quarterly ritual I call the “analyst two-step†and one reason more than two-thirds of companies beat the consensus almost every quarter. An ebb to the massive upward trend to the value of the U.S. dollar against other major currencies has also helped, as has the recent rebound in oil from six-year lows.
However, with the market trading at over 18 times trailing earnings at current levels investors should at least be mildly cautious here. Forward guidance for the next quarter has been conservative so far this earnings season. Greece looks like it could also be finally heading to a “Grexit†and now that spring has come to Ukraine another offensive by Russian backed “rebels†seems likely. These events could easily make the market more volatile in the weeks ahead.
What little “dry powder†I am allocating into the market now on any decent dips is going to what I term “Trifecta†stocks. The rare equities these days that still sell at attractive valuations, are seeing solid growth and provide a decent and growing dividend payout. Most of these are found in the large cap growth area. Below are two of these “Blue Chip Gems†which still look good in this overvalued market.
AbbVie (NYSE: ABBV) is a large biopharma company whose stock has recovered now from a brief sell-off triggered by the company’s over $20 billion acquisition of Pharmacyclics (NASDAQ: PCYC) in the first quarter. Helping the recent rise is some solid trial results from Imbruvica (a blood cancer drug which was the main reason for the purchase) for new indications which should boost sales further if drug is approved for treatment against different conditions.
