What a Week: Shifting the Paradigm

As equities soared to new highs, the old leadership came back, notes Paulsen.

The Russell 2000's all-time high spotlights the resilience of small-cap stocks. And cyclical companies likewise had a strong week. The Morgan Stanley Cyclical Index jumped 2.8% on the week, while some of its components fared even better: Caterpillar(CAT), Deere(DE), FedEx(FDX), and Ingersoll-Rand(IR) jumped 4.8% to 6.8%.

Overall, earnings strength is on pace with prior quarters as 64% of S&P 500 companies have beat expectations, 16% have matched, and 20% have missed, according to Thomson Financial. At this point, earnings are set to put in another quarter of double-digit growth -- at 10.4% -- but guidance is weaker than in prior quarters.

The ratio of S&P 500 companies that have provided positive preannouncements to those with negative preannouncements is 4.5 to 1, higher than the average 2-to-1 ratio, says John Butters, an analyst at Thomson.

Key to whether the post-Fed rally can extend into next week is the fourth-quarter productivity data out on Wednesday. Analysts expect 1.7% productivity growth, up sharply from the weak 0.2% rise in the third quarter. The report also includes the fourth-quarter unit labor costs. Productivity gains absorb the inflationary pressure of wage increases. Next week also includes the Institute for Supply Management's report on service sector activity.

Whatever next week's data, the market-moving drama comes in two weeks when Federal Reserve Chairman Ben Bernanke gives his semiannual testimony to Congress on the state of the economy. Given the recent figures, he's unlikely to veer from the new, more neutral script -- a shade of beige the financial markets were quite attracted to this week.

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