Stocks have made impressive gains lately, with the benchmark
indexes sitting pretty at multi-year highs. This is prompting
fresh money to pour into stocks in recent weeks, potentially
reversing a persistent trend of the last three years.
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Driving this optimism is the sense that the economic picture is
looking up and policy makers will be able to avoid obvious policy
missteps. Many of us expected the uninspiring state of corporate
earnings to put a brake to this emerging positive narrative, but
that hasn't happened either. So, where do we go from here?
Avoiding 'Fiscal Cliff' was a positive as is the recent deferment
of the debt-ceiling issue. Budget issues still remain, but the
relatively greater clarity on tax issues as a result of the cliff
deal has been reassuring enough.
The Fed continues to remain supportive by deploying the full
might of its balance sheet to keep interest rates low. The Fed
balance sheet just crossed the $3 trillion mark, more than triple
its size in 2008, and will likely reach $4 trillion by the end of
Optimism on the economic front isn't entirely misplaced either,
particularly with respect to the U.S. and China. The domestic
housing scene is clearly looking up, as today's December New Home
Sales numbers coming out a little will show. The knock on effects
that the housing recovery will have on the economy could get a
further boost if the trend in the last two weekly Jobless Claims
readings is for real.
Beyond the U.S. shores, the outlook for China has clearly
changed, with nobody talking about the much dreaded 'hard
landing' scenario anymore. By some measures even the situation in
Europe may not be as grim, as this morning's German business
confidence survey shows.
On the corporate earnings front, investors are finding enough
reassuring data points to sustain the positive momentum. Part of
the earnings outperformance is due to lowered expectations that
made it easier for companies to come out ahead.
Just like this morning's earnings beats from
Procter & Gamble
), we have positive earnings surprises from 63.9% of the 147
S&P 500 companies that have reported results as of this
morning. Unlike the third quarter, the revenue picture doesn't
look that bad either, with 59.2% of the companies coming ahead of
revenue expectations. But it's not all just lowered expectations;
company guidance has also been favorable, particularly relative
to what we heard from management teams in the third quarter.
But all is not well on the earnings front, as growth has
effectively flatlined. Total earnings for the 147 S&P 500
companies that have already reported results are up only +0.9%.
The composite earnings growth rate, combining the results of the
147 that have come out with the 353 still to come, is for +0.4%
only. This would mean that we will exit 2012 at an annual
earnings growth rate of less than 3%.
Expectations for 2013 suggest the growth pace picking up,
particularly in the back half of the year, to a pace almost three
times the 2012 level. I expected management teams to start
anchoring 2013 expectations at more 'reasonable' levels on the Q4
earnings calls. But barring a few exceptions, we haven't seen
that yet. In fact, management teams are talking about positive
signs out of China and stabilization in Europe.
What does all this mean? Perhaps the market's recent price action
is really reflecting favorable underlying momentum. Hard to buy
into this narrative, but there may be some basis after all the
positivity sloshing around us.