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October 22, 2013

Well, they came up with an eleventh hour deal to the problem that they themselves created…again. Hooray! Shall we replay it all over again in three or four months? Probably.

Of course, the “they” I reference are our country’s “leaders,” and the “deal” is an agreement to agree to disagree again early in 2014. Until then, though, the debt limit has leeway, government is reopened and federal employees will get back pay. Of course, the private sector that lost money due to the shut down won’t be as fortunate.

Nonetheless, we can move on to business matters for a couple of months. Thank goodness. S&P 500 earnings reporting activity picked up, and the trend continues on the slow but steady growth track that we have been on for over a year. Profit margins remain at historically high levels, profits and revenues are coming in at all time highs, and corporate balance sheets have been refinanced with lower rate debt. All in all, corporate America remains healthy.

According to Standard & Poor’s, ninety-nine S&P 500 companies had reported results as of Friday. Fifty-eight beat analysts’ earnings expectations, 26 missed and 15 met. This is a fairly healthy beat rate of about 60%. So far, the one negative takeaway from this earnings season is that growth remains very slow. Again, though, it is growth, and with low inflation, that may be enough to support markets.

While earnings growth has been tepid, dividend growth has been decent. More and more companies are returning cash to shareholders in the form of dividend payments. An S&P press release from 10/3/2013 shows that total dividend payments from public companies have increased 14% over this time last year. Further, companies with positive dividend events (e.g., initiations or increases) outpaced those with negative events (e.g., cuts or suspensions) by a 13-to-1 margin in the first nine months of 2013.

On valuation, S&P consensus expects S&P 500 companies to earn between $110 and $120 in 2014. That would put the forward price-to-earnings ratio at about 15, its historical average. Even after the strong performance of U.S. stocks so far this year, it’s difficult to call a market that is in line with its historical averages expensive. Barring a recession—something that looks fairly unlikely in the near term—the environment for investors seems favorable.

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