Headline: Earnings don't collapse

For the past few months, bears have been warning that investment prices are dangerously overvalued. In spite of the fact that the P/E ratio of the broad US stock market is near historic lows, doomsayers have argued that the market is still overvalued, because the bulls are too optimistic about future earnings and earnings are set to collapse.

We are now about one-fifth of the way through earnings season, and not only are earnings giving no indication of imminent collapse, but they are generally blowing past Wall Street estimates (the same estimates that the bears say are "too bullish").

Yesterday, machinery maker Caterpillar* reported income of $2.32 per share, well above analyst expectations of $1.73 per share and up 58% year-over-year. Revenues were up 35% from the year-ago quarter and beat analyst estimates by over a billion dollars.

A couple days ago, Apple* reported earnings of $13.87 per share for their most-recent quarter, demolishing the consensus estimate of $9.87 per share and representing 118% growth since the year-ago period. Revenue grew 73% to $46.3 billion, with quarterly iPhone sales more than doubling year-over-year to an incredible 37 million. iPad sales grew 111% year-over-year to 15.4 million sales during the quarter, well ahead of Wall Street estimates of 13.9 million.

We have been cautioning our readers to be wary of the constant barrage of negativity that has been coming out of many financial media outlets recently. Back in November, for instance, we said that:
the dire predictions of many media pundits and market commentators are overblown and overly pessimistic. Pessimism is in vogue right now, and optimism is out of fashion. However, we believe it is very important for investors to tune out the financial media and focus on actual business measurements. In fact, we have always said that trying to time economic ups and downs is folly anyway and that investors should focus on business fundamentals rather than economic predictions.
Going into this earnings season, you could still find plenty of bearish prognosticators saying things like, "As earnings season wears on, other executives might find it more difficult to put a smiley face on disappointing results" (from this article dated January 11), or arguing that the broad US stock market is between 20% and 40% overvalued (as this lengthy piece dated January 8 suggests).

We would advise our readers to try to tune out those who think they have a formula for detecting where in the "economic cycle" we are, and instead to focus on deploying their investment capital into well-run businesses with good prospects for future growth. As this earnings season has revealed so far, there are plenty of companies that meet this description, for those who care to look.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Apple, Inc. (AAPL) and did not own securities issued by Caterpillar (CAT).