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Investing Specialists

Corporations Feeling Their Oats

Soaring tech sector revenues, nicely improving home improvement stores, and optimism in industrials all point to a strengthening economy.

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Other than some very positive news on the inflation front, this week's economic data was sparse. Initial unemployment claims were the only other major indicator this week, and the news there was mildly disappointing, though not terribly surprising, as I explain below.

On the corporate earnings front, soaring tech sector revenues, including earnings from  Hewlett-Packard (HPQ) (see earnings note) and  Dell (DELL) (see earnings note) were indicative of a strong economy. Retail reports were more mixed, with  Wal-Mart  (WMT)disappointing in the U.S. (customers moving upscale?) and  Target  (TGT)light on revenues overall. Home improvement stores  Lowe's (LOW) and  Home Depot (HD) also reported nicely improving quarterly results, perhaps a precursor to an improving housing market. (Click for the Lowe's and Home Depot earnings notes.) Morningstar's industrials team also came back from a major manufacturing conference with an array of bullish tales.

Market Now Under Morningstar's Fair Value Estimate
As I warned several weeks ago, the economy and the stock market can and often do move in opposite directions. In the article, I also indicated the market was 7% overvalued at the beginning of May. As of Thursday's close, the market had moved to 6% undervalued according to Morningstar's proprietary price-to-fair value calculation. Lower stock prices and higher analyst-generated fair values were responsible for the change.

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Robert Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.