16 Oct 2012 Dodge & Cox - Q3 2012 Commentary ( Portfolio )
U.S. equity markets rebounded strongly in the third quarter of 2012 as investors responded positively to the stimulus announcements by the European Central Bank and the Federal Reserve. Nevertheless, the market environment continues to be volatile due to macroeconomic concerns. Investors remain cautious as uncertainty lingers in the United States around the outcome of the upcoming presidential election and the pending “fiscal cliff,” which may trigger government spending cuts and tax increases. In addition, continuing Eurozone challenges, Middle East tensions, and a slowing Chinese economy are factors dampening investor enthusiasm.

Notwithstanding macroeconomic uncertainties, we believe valuations are attractive. At quarter end, the S&P 500 traded at 13.7 times estimated forward earnings. The earnings power of many companies still appears underappreciated given ongoing balance sheet deleveraging (particularly within the financial sector), low interest rates, and continued corporate earnings progress. Long-term growth in the developing world, which is creating vast new markets for multinational companies to penetrate, is also a positive. We remain optimistic about the long-term outlook for equities.