While investors are showing more confidence in the market, corporate performance is also helping the rally. Company operating earnings during the fourth quarter of 2012 rose 7.3% for the 339 members of the S&P 500 that have reported results as of this writing. Sales for these same companies rose 5.9% over the same period. These may not be double-digit gains seen in an all-out bull market, but the results are far better than many analysts expected.
A cautious mood still prevails as companies keep a lid on expectations. FactSet Research said 63 S&P companies have lowered their first-quarter guidance, while only 17 have increased it. Several other IAS companies signaled that they expect to see slower growth during the first half of 2013. Analysts are forecasting that S&P companies will grow earnings at a 14% rate by the end of this year.
The economy is improving, but only at a modest rate. Lower inventories toward the end of 2012 suggest consumer demand may increase this year, forcing companies to increase their output. Those bellwethers of consumer spending—automotive and housing—also are growing nicely. Auto sales in January rose 7% to an annual pace of 15.5 million units, surpassing the rate of 10-11 million annual units we saw during the recession. December’s existing-home sales grew 13% year over year, and housing inventory has declined to below the ideal level in some markets.
The job-growth picture is still mixed, but there are some positive signs such as employers adding 157,000 jobs in January. Even with incremental progress in job growth, rising income and payroll taxes will take a bite out of consumers’ liquidity this year. Europe is still troubled, putting a damper on U.S. exports to European countries.
Should investors worry that after the strong gains in the market following the troughs of March 2009, it’s a bad time to jump into the market? We don’t think so. As we scan the market for investment opportunities, we don’t see the low-hanging fruit that was a bit easier to spot a few years ago. What we’re seeing appears to be a normal market with valuations that are not unreasonable.