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. 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 the year.
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 any more. 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
Proctor & Gamble
(
PG
),
Honeywell
(
HON
), and
Halliburton
(
HAL
), 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 flat lined. 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
for all the positivity sloshing around us.
New Home Sales
are scheduled for release today at 10:00 AM EST. In November, New
Home Sales increased by 4.4% to 377,000 from the revised October
rate of 361,000.
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