Tuesday, January 29, 2013
As the first FOMC meeting of 2013 gets underway today, it is
perhaps appropriate to acknowledge the Fed's contribution to
pushing stocks to within striking distance of new all-time
highs. The Fed is not the sole source of the all round air
optimism in the market; there is after all a positive turn in
economic data lately, the earnings season has turned out to be
decent enough, and Europe has become less worrisome.
That may be so, but interest rates would be a lot less
supportive if the Fed (and rich country central banks) wasn't
deploying its enormous balance sheets to keep them low. The Fed
balance sheet recently crossed the $3 trillion mark, more than
triple its size when the stock market last peaked in the fall of
2007. At its current pace, it is reasonable to expect that it
will be close to $4 trillion by the end of this year. The stock
market loves liquidity (who doesn't?) and the Fed seems
determined to keep the spigots open for quite some time to come.
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We don't have the Bernanke press conference this time around and
wouldn't be getting updated estimates from the FOMC members
either. The post meeting statement coming out Wednesday afternoon
is not expected to show any changes, though minutes of the last
meeting had raised fears that the easy-money policy may be ending
sooner than the announced timeline. The Fed aside, we will get
the November Case-Shiller Home Price index and the Conference
Board's Consumer Confidence data a little later.
On the earnings front, investors have been finding enough
reassuring data to sustain the positive stock market momentum. A
big part of the earnings outperformance is due to lowered
expectations that made it easier for companies to come out ahead.
We seee this in this morning's batch of earnings releases, with
better than expected results from
), though the Pfizer's guidance was on the weak side and generic
competition to Eli Lilly's flagship drugs seem to be heating up.
) also came out ahead of expectations, but guided towards
continued problems in Europe resulting in a 2013 loss in the
region equivalent to the 2012 level.
) also beat earnings and revenue expectations, with positive
momentum in the housing sector driving the homebuilder's orders
) will be the key earnings release after the close today.
We have positive earnings surprises from 64.5% of the 172 S&P
500 companies that have reported results as of this morning, with
total earnings for these 172 companies up +1.1% from the same
period last year. Please note that these 172 companies account
for 47.5% of the S&P 500's total market capitalization.
Unlike in the third quarter, the revenue picture doesn't look
that bad either, with 56.4% of the companies coming ahead of
revenue expectations and total revenues up +4.3% from the same
period last year. This is better performance than what these same
companies reported in the third quarter and broadly in-line with
results over the past year.
But to say that the market has solely become satisfied due to the
ratio and magnitude of these beats would be unfair. Company
guidance has been favorable as well, particularly relative to
what we heard from management teams in the third quarter.
Companies are not raising guidance, but neither are they not
lowering them either, by and large. And that helps investors gain
confidence in estimates for 2013, which many of us had been
raising doubts over for quite some time.
The overall positive tone in the market, however, shouldn't hide
the fact that earnings growth has effectively flat lined. The
composite earnings growth rate, combining the results of the 172
that have come out with the 328 still to come, is for only +0.8%
growth. The final growth tally for Q4 will most likely come in at
around +2%. This would mean that total earnings were up about +3%
in 2012. But expectations for 2013 suggest the growth pace
picking up, particularly in the back half of the year and
carrying into 2014. This reflects the second-half recovery
narrative imbedded in current GDP growth estimates referred to
earlier. I have been skeptical of these growth expectations for a
while, but the market has been shrugging the growing evidence
Director of Research