Market Week in Review

S&P 500 1,140.60 +.53% for the week.

U.S. stocks finished higher on the week led by technology shares as numerous quarterly reports exceeded investor expectations. General Motors(GM), Motorola(MOT), Ford(F), Qualcomm(QCOM), Juniper(JNPR), eBay(EBAY), American International Group(AIG), United Parcel Service(UPS), Caterpillar(CAT), American Express(AXP), Microsoft(MSFT), Broadcom(BRCM), 3M(MMM), Altria(MO), Eli Lilly(LLY), Wells Fargo(WFC), Coca-Cola(KO), Amgen(AMGN), Cummins(CMI), Honeywell(HON) and Corning(GLW) are some of the major U.S. companies that reported stellar results. Bloomberg reported that with more than half of the S&P 500 having reported quarterly results, 78% have exceeded expectations and only 11% have missed estimates. The average earnings increase so far is 26% versus estimates of 13% when the period began, Thomson Financial reported. Doug Cote, who helps manage $40 billion at ING Investment Management, said, "Earnings will continue to surprise on the upside and that will trump inflation scares every time."

Last week was characterized by a tug-of-war between strong corporate/economic reports and rising interest rates. The Wireless and Software sectors, led by Motorola and Microsoft respectively, were the stand-outs for the week. Interest rates rose again last week on the strongest Durable Goods report since the early 80's, great corporate earnings reports and continued inflation worries. Commodity-related sectors continued their recent downtrends as the U.S. dollar rose and China talked of slowing its scorching economy. The CRB Index, a measure of commodity prices, broke down through its six-month uptrend line last week.

BOTTOM LINE: I believe the major U.S. indices are preparing for an assault on their recent highs. I would like to see the NASDAQ break 2,060 on good volume to confirm last week's move. I can't emphasize enough how important Microsoft's report is to the overall market. This company has been a drag on the performance of the major indices during this entire bull-run. I think its performance will only improve throughout the year as corporate hiring and spending accelerate. The fall in the CRB Index is a very positive development as well. Commodity prices have been the main source of investor concerns over inflation. The S&P 500 current P/E of 22.1 is below where it was in 1992 and 1987 before major bull moves. However, most pundits and analysts harp on excessive valuations. The P/E on 04 estimates is 18 and falling as numerous companies are significantly beating expectations. While I do not view the market as cheap, I hardly find its valuation excessive given corporate profits are at all-time highs, American's net worth is at all-time highs, inflation and interest rates are relatively low, U.S. and world economic growth is the strongest since the early 80's, job growth is accelerating and productivity is near record levels. U.S. stocks deserve a premium multiple based on these characteristics.