We are now two-and-a-half weeks into a very important earnings reporting season, and as we expected, results have definitely been mixed. In fact, outside of Apple�s (NASDAQ:AAPL) blowout results Tuesday, most earnings have not been particularly robust — I give Apple kudos for a tremendous quarter, but I still question whether it can sustain this kind of growth, now more than ever. And yet, the market continues to drift upward, with the S&P now ahead over 5% in just the first four weeks of 2012 — its best start in 15 years.
This affirms what I�ve been saying for some time now: After the extreme volatility last summer and fall, lower expectations were already priced into stocks and results have been so strong those expectations do not need to be adjusted again. It�s clear some of the worst fears about corporate profits are not being realized and, barring a sharp downturn in the economy, 2012 should be another year of profit growth — albeit at a slower pace. There still are many important reports to come but, for now, earnings season is being well-received by the market.
A relatively calm tone in Europe also is helping. Despite some snags in talks between Greece and its creditors, the euro has rebounded against the dollar this week. In addition, yields on Italian 10-year bonds, which have become the benchmark for measuring uncertainty in Europe, got as low as 6% this week and remain well below the 7% �danger� level.
That�s a notable shift when the failure of creditors to reach an agreement with Greece has not disrupted the market rally. Last summer, investors likely would have fled for the exits over similar news. So, this raises the question: Has the market finally realized that Greece, a relatively small country, can default without seriously impacting the European economy?
My answer would be, yes,� as long as any default is orderly. This also seems to be the view of German Transport Minister Peter Ramsauer, who broke with the official EU line by telling Die Zeit weekly it would �not be the end of the world� if Greece were forced to exit the eurozone.
Events in Washington also are not really stirring the market, even with the fight for the Republican presidential nomination in full swing, a State of the Union address and yesterday�s Federal Reserve meeting. President Barack Obama�s call for higher taxes on the wealthy and expanded mortgage relief did spark a significant reaction, as these proposals are not likely to become law with election-year gridlock likely to take hold for most of 2012 — look for the election to become a more important issue for the market as we move closer to November.
Yesterday�s Federal Reserve meeting went largely as expected, although the Fed did extend the time frame in which it expects interest rates to stay low to the end of 2014, from mid-2013 previously. There still are no immediate plans for another round of quantitative easing, but even without it, current Fed policy is quite supportive of the market. You could see evidence of that when stocks turned positive after the Fed�s announcement.
All of this dovetails perfectly with my current strategy of investing in companies set to grow earnings even in a slower global economy. I expect 2012 to be a good year for stocks, in large part because market valuations are quite favorable in relation to the historically low interest rates.
Let�s run through some numbers to show you what I mean:
The general consensus expects earnings for the entire S&P to come in at $101 a share this year, which makes the current P/E approximately 13. The inverse of this number, which is the earnings yield, is 7.6%. In comparison, 10-year Treasury notes yield 2.01% and 10-year investment-grade corporate bonds yield 4.46%, so you can clearly see the value in the market.
I also think P/E ratios are likely to expand this year, pushing stocks higher, if there is no significant bad news as fear lessens and the desire for better returns builds.
No comments :
Post a Comment