Hutchens Investment Management: What Follows Earnings - - Stock Prices

CONCORD, N.H. - July 22, 2013 - PRLog -- According to the Bespoke Investment Group, about 150 companies, or 10% of the total universe, have reported 2Q2013 earnings. Of this total, 69% have beaten earnings estimates. Revenue beats continued to be weak with barely 50% surpassing estimates. The pattern is similar to 3Q2012, 4Q2012 and 1Q2013 when earnings rose in the +5-7% range. The recent rally in stocks follows the “taper tantrum” after the Fed June meeting. The rally began when Chairman Bernanke calmed the waters by reiterating for the 100th time that tapering is not tightening, and will be determined by the economic numbers, Fed policy will continue to be accommodative. Immediately following this statement, stocks rallied with the S&P 500 up 5.8% through last Friday.

The market reaction has carried into earnings season, which by historical standards is thus far uneventful. Again, the market tone is governed by the belief that the Fed put remains, and will continue until the economy improves and can stand on its own. Since stocks discount future earnings, the current reporting season is largely already in prices, and the market is looking out to 4Q2013 when earnings are forecast to rise 12.4% year-over-year. According to ThompsonReuters, the forward four quarter estimate for the S&P 500 is $116.74. The P/E ratio on this estimate is 14.5(X). More importantly, the year-over-year growth rate for this earnings estimate is 6.59%. The S&P 500 currently trades at 15(X) projected 2013 profits and 14(X) estimated 2014 earnings. Year to date the S&P 500 is up 18%. As we move through the second half of 2013, in an environment of rising earnings with an improving growth rate, stocks will seem cheaper, enabling for multiple expansion and accompany higher stock prices. In addition to Fed policy, this in part, explains todays rising stock market.

Our investment policy continues to maintain a full position in equities. Any increased volatility is indicative of market uncertainty, not of a chaotic outcome of Fed policy. The market is moving away from the summer doldrums and approaching the seasonally more favorable fall and winter months.

Authors:
David Minor
Rebecca Goyette

Editor:
William Hutchens