If you're being kept awake by a neighbor's party, you may as
well get dressed and join the fun. That was the possible reaction
to
Wall Street
strategists, who issued fairly dour "year-ahead" reports back in
December, predicting the
market
would soon stall out. In hindsight, they were flat wrong, with the
S&P 500 now handily above even the most
bullish
price targets.
Well, analysts at Credit Suisse threw in the towel in mid-March,
boosting their target for the S&P 500 to 1,470. That's about 4%
above current levels. The key change in their thinking: "We still
expect [U.S.]
GDP
growth to slow ... but the risk now is that it slows less than we
expected." And they think that stocks remain fairly inexpensive,
even after the recent surge, adding that stock gains are likely to
come at the expense of
bonds
, which are likely to lose value as
bond
yields rise.
Analysts at Goldman Sachs had been quite
bearish
until recently. Back in February, I noted that they thought the
S&P 500 was likely to slump back to 1,250 in the face of tepid
global growth in the United States and a
recession
in Europe. They also suggested the
index
would plunge to 900 if the European mess led to a global recession
in coming quarters.
Now they are singing a very different tune. In a much-discussed
report issued on March 21, Goldman's analysts are suggesting we're
entering an era of the "long, good buy" for stocks (and as Credit
Suisse suggests, a commensurate move out of bonds). [Our own Adam
Fischbaum
recently suggested
that readers begin to rotate out of bonds right now before the herd
catches on.]
Goldman's core belief is that the risk premium associated with
stocks is now quickly diminishing. They constantly analyze reams of
historical data related to perceived risk and projected returns,
recently concluding that the current investor mood may still be too
cautious. "While risks abound, and future
earnings
may be weaker than experienced over the past decade, there are
growing reasons to believe they may not be as bad as markets are
pricing." In fact, they see a fairly bright global economic picture
in the years ahead as continued strong growth in key
emerging markets
boosts trade across nations: "Our global projections show that the
next decade is likely to be a peak period for global growth."
Even as investors focus on the long-term positive backdrop for
stocks, they can't ignore the fact that stocks have already made a
strong run in both the recent short-term (the past six months) and
the medium-term (the past three years). That's why investors need
to pay sharp attention to results and commentary in this upcoming
earnings season
. If ill winds start to blow, then it's time to raise cash and
position yourself for long-term opportunities AFTER they have seen
some profit-taking.
Here's what I am watching this earnings season...
1. Europe's impact on earnings
Back in late January, a wide range of blue chip companies noted
that operations in Europe were becoming challenging, but not
necessarily slumping deeply. That partially explains the
post-earnings trading gains we've seen, as Europe-related fears
receded. Yet it's too soon to signal that we're in the clear.
Listen to companies like
Ford (NYSE: NYSE: F), GE (
GE
)
, and
Procter & Gamble (
PG
)
to be sure whether they are still saying Europe is simply weak but
not miserable.
2.
Margin
compression
Investors may not yet fully grasp that
profit
margins have likely peaked and could even turn down a bit as input
costs such as labor and material start to rise. I discussed this
topic roughly a week ago and noted that "year-over-year profit
margins are expected to fall slightly in the first three quarters
of 2012 and rise only modestly in the fourth quarter. The clear
takeaway: to boost profits, companies are increasingly relying on
good old-fashioned sales growth." If margins hold firm or actually
rise a bit for many S&P 500 firms, then this rally can surely
continue.
3. Will Washington spook the stock market?
In the few years following the economic slump of 2008, many
executives spoke of an inability to commit to major internal
investments while the legislative gridlock in Washington created so
much uncertainty. Now, we're just a few quarters away from the next
budget battles, primarily focusing on the expiration of Bush-era
tax cuts and potentially deeper reductions in government spending.
In a nutshell, if corporate executives believe that these issues
will be addressed in a mature fashion and Washington can avoid
gridlock, then you can expect to hear about robust plans for
investments in growth at many businesses. Yet if executives remain
cautious about fresh spending commitments, then they may
unwittingly sow the seeds of an economic slowdown and a slumping
stock market.
4. The
economy
still matters
As the upcoming earnings season hits a crescendo, so will a wave of
economic data. The economic backdrop has looked very enticing
lately, but a chorus of economists continues to warn that we'll see
a pullback in the data this spring, as was the case in 2011.
Key items to watch include:
-- April 3: FOMC Minutes are released that give a read into the
Federal Reserve's next move
-- April 6: Monthly employment report
-- April 13: Consumer Price Index
-- April 24: The Conference Board's survey of consumer confidence
-- May 1: The ISM manufacturing index
Risks to Consider:
The market's recent move tacitly implies an improving outlook
for corporate profits in coming years, though proof of that trend
isn't yet in evidence.
Action to take -->
There is no contradiction between having a bullish long-term view
and a cautious near-term view, and I think that's probably the best
philosophy to have right now. Note that even as the market rallied
sharply from the March 2009 lows, there were several major dips in
between, and knowing when to raise cash and then putting it back to
work later has become a key trait for many skilled investors.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.