The markets have continued to move higher in anticipation of a strengthening economy and stronger corporate earnings.  Third quarter earnings have not disappointed.  As of this writing 165 companies, representing more than 50% of the S&P 500, had reported third-quarter earnings results.  Of those, nearly 80% beat consensus analyst estimates, an exceptionally strong showing, even in a reinvigorating economy.  In particular, notable strength has come from companies like Google, Apple, Amazon, AT&T, Intel, Pfizer and Wells Fargo.  The naysayers will claim that the profit surprises have come directly from cost-cutting and productivity gains and that has certainly played a part but at a closer glance, you can see true revenue growth is also surpassing expectations in most sectors.  Sales are on the rise.  Most importantly, we are seeing companies regain their earnings visibility and issue upside guidance for the coming quarters.   In the end, third quarter earnings have been just what the doctor ordered.

The synchronized global upturn is lifting profits by strengthening earnings of domestic companies and both sales and earnings for U.S. multinationals.  The declining dollar and improving U.S. trade are also lifting U.S. multinational earnings.  However, there remain concerns regarding the economy.  First and foremost is the American consumer.

The U.S. consumer is still clearly feeling the pain of the recession.  Unemployment is still on the rise and it looks like we are headed toward a 10½ % unemployment rate before it’s all said and done.  With consumers in such a bind and spending still relatively weak you might question how the stock market can be performing so strongly.  But, the markets are forward looking and anticipating unemployment to peak and begin declining in the next couple quarters.  Further, although the consumer is the primary driver of economic growth, many other factors drive the S&P 500, including commodities, business investment and global growth trends.  While the consumer is unlikely to make giant strides out of the recession, corporate profitability overall has made significant gains, helping propel the market higher.

In the end, we are in the reality of any rally; markets climb a wall of worry.  Certainly, we need the American consumer to get into better financial shape (this is me giving you permission to go buy some new appliances and do your part) but where we are today is exactly where we are coming out of most bear markets.  There are a lot of questions to be answered but each day we get a few more answers.  It takes time for economies to heal.  But, the reality of this economy and market recovery is that we think we are right where we need to be.  In the short- to intermediate-term, we may very well see a normal correction take hold.  That is simply market logic.  That said, if the economy continues to improve and the consumer comes around, any correction would provide a good buying opportunity for what could morph into our next bull market.