Profits matter most for U.S. stocks as economy fixation dims

Profits are moving U.S. equity prices more than any time since the bull market began 3 1/2 years ago, rewarding investors for picking stocks based on company data instead of following the herd rocked by Europe’s debt crisis and the slowing U.S. economy.

Companies in the Standard & Poor’s 500 Index rose or fell an average of 4.4 percent the day after releasing results since July, according to data compiled by Bloomberg. The last time they moved more was in the second quarter of 2009. Daily swings in the benchmark gauge narrowed to 0.4 percent last month from 2.2 percent a year ago, as economic and policy changes battered investors. More than 475 S&P 500 stocks moved in the same direction in six of the first nine days of August 2011, with all 500 down on Aug. 8.

Bulls say lockstep moves are diminishing because investors are changing their behavior, making choices based on corporate results at a time when analysts estimate profits for companies in the S&P 500 will rise almost 10 percent a year through 2014. Bears say the focus on earnings won’t bring back individuals who have drained more than $420 billion from U.S. equity mutual funds over the past four years even as stocks rallied 108 percent since March 2009 and net income was unchanged in the second quarter.

“I’m not saying it’s an easy job to be a stock picker in this environment, but it’s certainly easier,” Sandy Lincoln, the Chicago-based chief market strategist with BMO Global Asset Management, which oversees about $100 billion, said in an Aug. 28 interview. “Stock selection does have the opportunity here to finally show a face with a smile.”

Calm Markets

Earnings matter more as concern about Europe’s debt crisis eases following European Central Bank President Mario Draghi’s pledge to defend the euro. The S&P 500 fell 0.3 percent last week, trimming the 2012 gain to 12 percent, as evidence of a global economic slowdown overshadowed speculation the Federal Reserve will introduce stimulus measures. The index slid 0.6 percent to 1,398.60 at 11:14 a.m. in New York today.

Fed Chairman Ben S. Bernanke said on Aug. 31 in a speech to central bankers and economists at an annual forum in Jackson Hole, Wyoming that a new round of bond purchases is an option, citing unemployment of more than 8 percent as a “grave concern.”

The S&P 500’s 1.9 percent gain on Aug. 3 was the month’s only daily swing greater than 1 percent, compared with nine such fluctuations in June, data compiled by Bloomberg show. While markets calmed, MetroPCS Communications Inc., Western Digital Corp. and eight other companies rose or fell more than 20 percent on the day after reporting earnings.

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