First quarter earnings look OK but not great and broadly consistent with Wall Street strategists\u2019 expectation of $108 for S&P 500 EPS this year.\u00a0 That\u2019s bad news for bears who expect weak profits to derail the rally.\u00a0 Despite mediocre profits, the \u201cvaluation levitation\u201d we have been writing about for months should continue, because the stock market rally is not being driven by \u201cbetter than expected profits\u201d but, rather, by the fact that stocks are \u201ctoo cheap\u201d in an age of sub-2% bond yield.\u00a0 It\u2019s a replay of the 1980s.\u00a0 Look for the S&P 500 to be above 1650 by the end of this year, which would imply a trailing PE ratio of just 15.2x, and a prospective dividend yield on 2014 DPS of 2.4%– attractive when the 10-year Treasury bond yields 2%.<\/p>\n
Though CEOs are no more clairvoyant than economists, they do have an insider\u2019s view of order books, customers\u2019 psychology, and the state of the world economy.\u00a0 Here are seven themes:<\/p>\n
Weak Commodity Prices\u2014Negative for Profits Short-term, but Positive Long-term<\/strong><\/p>\n For this year lower prices for oil, copper, and other commodities are bearish for profits, because they shift national income from companies to consumers\u2014when oil prices drop ExxonMobil earns less but Jane Doe spends less at the pump.\u00a0 But although it may take a dollar or two off of 2013 S&P 500 EPS, the recent drop in oil prices is positive in that the consumer relief allows the economy to keep growing; it cuts the risk we will tip over into recession.\u00a0 Thus weak commodity prices increases the probability that profits will keep growing in 2014 \u2013 which is more important to investors than whether profits this year are $107 or $110.<\/p>\n The drop in oil prices is positive for airlines and broadly positive for consumer-oriented companies (particularly vendors of commodity-intensive products such as soap), both because their customers have more discretionary income and because input costs decline. \u00a0The profit impact is not huge but does help companies like P&G \u201cmake their numbers\u201d in a soft economy. In addition to energy producers, lower commodity prices hurt industrial companies that supply compressors, trucks, graders and other equipment to energy and mining companies.<\/p>\n Copyright Thomas Doerflinger 2013.\u00a0 All Rights Reserved<\/p>\n","protected":false},"excerpt":{"rendered":" First quarter earnings look OK but not great and broadly consistent with Wall Street strategists\u2019 expectation of $108 for S&P 500 EPS this year.\u00a0 That\u2019s bad news for bears who expect weak profits to derail the rally.\u00a0 Despite mediocre profits, … Continue reading