"I would much rather own equities at 9,000 on the Dow than have a long investment in government bonds or a continuously rolling investment in short-term money."
-- Warren Buffett earlier today on CNBC

The rally that started in March got a big boost in July as second quarter earnings reports have delighted investors.  As you've probably heard, the Dow is above 9,000 and the S&P 500 is flirting with 1,000. Yet, Buffett's still long-term bullish. Let's see what Fools think about the recent earnings-fueled celebration: 

What's the one thing that has surprised you the most since earnings season kicked into gear two weeks ago?

Dan Caplinger: I'm amazed at how investors continue to bid up shares even as profits continue to lag year-ago levels. AT&T and eBay (NASDAQ:EBAY) both jumped yesterday by beating analyst estimates, but both posted numbers well short of last year's earnings. After such a big rally already, you'd think investors would want evidence of real current growth before pushing shares up further.

Rick Munarriz: I'm refreshingly stunned to see companies deliver on their promises to scale back costs. The layoffs weren't just lip service. It hit home with this week's report out of Starbucks. The baron of baristas posted year-over-year earnings growth despite another quarter of negative comps. 

This isn't condescension. This is respect. Trimming away corporate overhead seemed like the trendy thing to do earlier this year. If it's helping companies more than get by now, can you imagine how great earnings will start to look once the economy is firing on all cylinders? 

These past two weeks have been eye openers ... in good ways.

Anders Bylund: The force of Mr. Market's reaction to getting some good news at long last. If you bought equal portions of Diamonds, Qubes, and Spydrs on July 10, right before earnings season kicked off, you'd have an impressive streak of "up" days and an 11.7% return today. Sure, I'm used to wild market reactions to even tiny news -- but a sustained rally like this comes straight out of left field.

Matt Koppenheffer: Since overall I'm relatively bullish on the market, I hate to say it, but it's been the lousy reports from the banking sector that surprised me the most so far. I know, I know, Goldman Sachs (NYSE:GS) blew the doors off the market and Bank of America (NYSE:BAC) and Citigroup (NYSE:C) each rang up a profitable bottom line. Dig deeper though, and you'll find that the profits at Citi and B of A were illusory at best. Goldman's profits may have been real, but considering where a lot of those profits came from, I'm concerned that nobody's learned anything from the financial meltdown.

Don't get me wrong, I think the banking sector is definitely moving in the right direction, but I think they've still got significant work ahead -- particularly in the core banking business -- before they'll get a pat on the back from me.

Alyce Lomax: Like Anders and Dan, I'm surprised by the euphoria. Many companies have been reporting "better than expected" quarterly profits, but for many, sales are down. That's not surprising given the economic climate and lackluster consumer confidence, but unbridled optimism seems shockingly simple-minded. I have a feeling that some companies' zeal to bolster profits in the face of all the fear means they will cut some of their best talent and perhaps alienate customers if they cut too close to the bone, and that's no good for the long term. Count to 10.

Meanwhile, even though a lot of companies have been getting second chances with their huge debt (look at CIT Group or New York Times as examples), they're relying on temporary life preservers, and challenges still loom. I've watched shares of many very beleaguered companies soar as the market rallies; many investors still seem to have a speculative, short-term view, instead of looking for stocks of quality companies that can weather the tough times.

Tim Beyers: Yesterday, I wrote on Twitter that Microsoft's (NASDAQ:MSFT) fourth-quarter revenue shortfall -- $1.3 billion less than Wall Street expected -- wasn't too surprising. Mr. Softy missed by $500 million in Q3.

Still, a billion-dollar miss was bound to raise some eyebrows, and I'll admit to going cockeyed after looking at the numbers. Most surprising was that Windows operating system revenue dropped year over year for the first time in company history. Good thing Windows 7 is code complete and due to ship on time. It can't get here fast enough.

Morgan Housel: Bank earnings have really surprised me. And not because they were good or bad, but blatantly fake. The two problem banks, Citigroup and Bank of America, both reported big profits entirely made up of asset sales. Raising a few bucks with an occasional garage sale is handy in times like these, but it doesn't reflect true earnings power, and it gives investors a false sense of hope.

And then you think, gee, we have interest rates at zero, and these banks still can't earn real profits without one-time gains. That's like firing caffeine straight into someone's veins and still having 'em fall asleep on you. When bank analyst Meredith Whitney recently said "the underlying core, earnings power of these banks is negligible," she wasn't joking. 

Alex Dumortier: The headlines have been a stockbroker's dream come true this earnings season, with earnings "beats" by high-profile, bellwether stocks such as JPMorgan Chase, Intel, and Caterpillar (NYSE:CAT). But there is more: With second quarter results now in for over half of the companies in the S&P 500, it's the frequency with which companies have posted stronger-than-expected earnings that looks surprising: By my calculations, approximately four out five reporting companies in the index beat their consensus earnings-per-share estimate.

However, once you do a little scratching, the picture is less cheery:

  • Half of the companies failed to meet/exceed the consensus revenue estimate.
  • Even in sectors that are considered to be "defensive," the percentage of companies that failed to meet/exceed revenue expectations is high: health care, 41%; and consumer staples, 61%.

Have the last two weeks changed your views at all?

Dan Caplinger: No. Despite the emphasis on those companies that beat expectations, you've seen a fair mix of companies -- Amazon.com (NASDAQ:AMZN) and Microsoft, most recently -- come in with disappointments. I fully expect the markets to keep oscillating between euphoria and fear as long as the economy remains on shaky ground, and investors will stay nervous until the government stops having to spend so much money toward stabilizing the financial system.

Anders Bylund: Fundamentally -- no. For me, investing is still about finding great companies at decent-to-grotesque discounts to their real value. Whether the Dow stands at 4,000 or 14,000, there will always be great individual stocks out there. I'm drooling over this stock right now, for example.

Tim Beyers: My views haven't changed. Tech still boasts some of the market's very best balance sheets -- Microsoft is an example -- and I'm most comfortable betting on businesses that don't have to borrow to fund growth. I'm in tech for the very long term.

Alyce Lomax: I'm not convinced that things are as "less bad" as people seem to think they are. People seem to be grasping at straws to find something to be happy about, and ignoring a lot of very serious bearish signs about the overall macroeconomic environment as they focus on "earnings beats." (And apparently the bleak quarterly tidings from UPS got lost in the feel-good mania.)

The unemployment rate is high and going higher, there is still a huge inventory of houses out there, many more people will foreclose, the government stimulus package has been a boondoggle, and the U.S. government, as well as many corporations and consumers, are overly indebted. Mr. Market may be clinically diagnosable as bipolar, but I think a little dose of realism is in order; that trip to Vegas really isn't a good idea, and that's what investors are doing when they're buying up shares of some of the most challenged companies.

Alex Dumortier: Not really. I'm not a curmudgeon, so I'll start by saying that, over the long-term, I'm optimistic about the prospects for the U.S. economy. Nevertheless, in the medium term, we are in for a very lengthy, tepid recovery -- even a "double-dip" recession can't be excluded. This season's earnings results appear to confirm that U.S. companies are exceptionally nimble when it comes to reducing costs in the face a difficult environment. However, there are limits to that process, and it can't fully compensate for the effects of a demand-driven recession. Expect these effects to be long-lasting, as unemployment will remain stubbornly high.

In sum, there's no going back to the "glory days" we experienced earlier in this decade when it appeared that the U.S. consumer could carry the entire world economy on its back. Investors need to adapt to that reality: Get exposure to international stocks and, domestically, focus on stable, well-financed businesses trading at reasonable prices.

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