Just above 14 times this year's earnings, stocks remain
Consider our financial market landscape. Even after its recent
rise, the 10-year U.S. Treasury pays a meager 2.00%. Your checking
account and CDs offer even less. Historically, the earnings yield
on stocks is +3% higher than the U.S. Treasury rate. Meaning stocks
should offer investors a 5.00% likely annual return.
A stock's earnings yield is nothing more than turning the P/E
ratio on its head. When we divide a $105 projected earnings
consensus for 2013 by an S&P 500 index around 1500, we get a
7.0% earnings yield. After January's rally, solid proof
exists on undervaluation.
With all the above, we remain comfortable putting out a 2013
target of 1600 for the year-end S&P 500. That is only an
earnings yield of 6.56%. In fact, if we get towards the end
of 2013 with U.S. GDP in healthy shape and no U.S. recession on the
horizon, we could easily get a nice stretch above 1600.
Having said that, stocks ran too hot in January and early
February. A short-term pause or correction is due.
Q4 Earnings Reports In
For Q4, 342 S&P 500 companies reported earnings and revenues
by Feb. 8th. They were up +2.8% and +0.9%, respectively.
Revenue outperformance has been largely a function of subdued
expectations. Composite (all 500 company) earnings and revenue
growth rates for Q4 are +1.6% and +0.5%, respectively. Better than
Q3, but the second lowest growth rates since recovery got underway
The market doesn't seem overly concerned. It is looking
ahead to expected GDP growth in 2H. Earnings growth in 2H-13 and
2014, which mirror estimates for GDP growth, shows a material ramp
up. A less worrisome tone of company guidance on Q4 earnings
calls and recent favorable macro data raised confidence. This has
been at play in the S&P 500's positive momentum.
A Fresh Look at Zacks Ranked Industries
(A) With a rise in Jan. U.S. jobs numbers and upward 2012 jobs
revisions, and an improved stock market, the personal side of
was highly ranked:
Home Furnishing Appliances
industries showed us very weak Zacks Ranks in the consumer
(B) High Zacks Ranked industries arrived from building U.S.
momentum in the Finance Sector focused on home finance and the
Thrifts & Mortgage Finance
Investment Banking & Brokering
industries showed up strong.
moved down to a Market Weight.
(C) Marked improvement in the global outlook (mostly China)
. Fresh strength was apparent in rising Zacks Industry Ranks for
(D) In addition, there is a notable change inside Industrial
sectors on this stronger global outlook.
Construction & Engineering Services
(E) IT recovered too, as
rose to become attractive Zacks Ranked Industries, while
rose to a market weight.
Computer Software & Services
was ranked as a market-weight industry after the latest spate of
(F) Stronger oil and gasoline at the pump prices played out
within the Energy sector. We saw
Refiners & Marketers
do best, though there was a Zacks Rank rise in
companies further downstream.
remain weak, victims of low natural gas prices.
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