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.
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 Pfizer (PFE) and Eli Lilly (LLY), though the Pfizer’s guidance was on the weak side and generic competition to Eli Lilly’s flagship drugs seem to be heating up. Ford (F) 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. D.R. Horton (DHI) also beat earnings and revenue expectations, with positive momentum in the housing sector driving the homebuilder’s orders and backlog. Amazon (AMZN) 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 thus far.
Director of Research
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