Earnings Also At All-Time Highs
When bears argue that the surge to all-time highs is suspect because the Federal Reserve has played such a huge role in the run-up, they raise a good point. When they argue the entire rally is a debt-fueled bubble inflated by the Fed's extreme monetary ease, they overstate their case. For example:
• Corporate earnings are at all-time highs, and December-quarter results provided grounds for optimism. With nearly all companies in the S&P 500 Index having reported, quarterly earnings for the index are expected to be up 6.1% from a year earlier — significantly better than the 1.9% growth expected in mid-January, according to Thomson Reuters.
• Dividends for the S&P 500 Index are at all-time highs — and likely headed meaningfully higher this year, partly because big banks are expected to soon lift their payouts in response to the Fed's latest round of stress tests.
• Share repurchases have surged, with U.S. companies announcing plans to buy back $117.8 billion of their own shares in February — the highest monthly total since at least 1985, according to Birinyi Associates.
• While the U.S. economy is growing slowly, improvements in the housing and labor markets point to better times. U.S. home prices rose about 7% in 2012, and analysts expect continued improvement this year. The unemployment rate has dropped to a four-year low, helped by a better-than-expected February employment report. The number of U.S. workers being fired is at the lowest level in at least 12 years, and initial unemployment claims are near five-year lows.
• Helped by the revolution in shale drilling, U.S. oil production is expected to reach a 28-year high this year. By 2020, the International Energy Agency predicts, U.S. oil production will exceed that of Saudi Arabia. The impact on the natural-gas market has been even more profound, with expectations of growing supply and continued low prices prompting companies making products including chemicals, steel, and fertilizer to announce multibillion-dollar investments in new plants.
• The global economy is muddling through. China's economy is slowing but for now seems likely to avoid the hard landing many feared in late 2012. The European Central Bank has signaled it is willing to be the lender of last resort to avoid a breakup of the euro zone, diminishing the risk of another global credit crisis.
A market pullback would not be surprising, and bear markets often begin when earnings and dividends are at all-time highs. Still, with stock valuations reasonable and the primary trend unequivocally bullish under the Dow Theory, we are keeping 92% to 98% of our buy lists in stocks.