Heading Back Up

We noted last week that the stock market benchmarks appeared to have reached a short-term bottom. Friday brought a furious rally that continued today. The recent leadership by materials and energy may expand to include utilities as funds from that sector creep higher in our momentum rankings. Financials, real estate and consumer discretionary sector funds are still weak.

Earnings season is winding down and, contrary to early impressions, results aren't so bad. About two-thirds of the S&P 500 companies have beaten analyst estimates. Excluding a 25% drop in earnings at financial companies, profits grew at an average 11% pace in the third quarter. A heavy weighting in financials is holding back the broad-market benchmarks. There is still plenty of opportunity in the sectors that are showing growth potential.

The Federal Reserve meets this week to decide its next move on interest rate policy. The odds of a half-percentage point rate cut have dropped over the last few days, with the futures market now indicating a 98% chance the Fed will cut rates by a quarter-point instead. Bond market maven Bill Gross of Pimco Advisors thinks the Fed is on a course that will bring short-term rates down to the 3.5%. area. That seems hard to believe but we wouldn't bet against Mr. Gross.