Corporate Earnings Update and the Impact on Our Strategy

According to Bloomberg, of the 365 S&P 500 companies that have reported results thus far, profit growth has increased 3.4% year/year and revenue has grown 2.4% versus last year.  76% of companies have exceeded analysts’ profit expectations, with 54% beating revenue expectations.  As we’ve pointed out in the past, these results come on the back of sharply reduced estimates coming into the quarter.  Despite the lackluster sales and profit growth numbers, both stocks and corporate bonds have performed quite nicely over the past few months.  This is especially true for bonds issued by financial companies such as Bank of America, with returns far outpacing the broad corporate bond index.  Over the past few trading sessions, we have been selectively locking in profits on corporate holdings such as BAC, as credit spreads have fallen to levels that fail to compensate us for the risk of continuing to hold the bonds.  We believe that if the outlook for sales and profit growth fails to improve, risk assets like corporate bonds are in danger of correcting, which will provide an attractive re-entry point to deploy capital into the corporate market.