The first quarter of 2013 has signaled a mixed start to the earnings season. To date, 104 companies have reported earnings, of which, 23 entities have missed earnings estimates and 11 have just met estimates. Going forward, I do expect a lot more earnings disappointment. This article discusses the earnings growth trend over the last 12 quarters and the reasons for expecting a relatively bleak first quarter of 2013.
At the onset, I must mention that the S&P 500 does not necessarily reflect a bright outlook for the near term. That would be the general conclusion considering the fact the S&P is still trading at near all-time highs. The rise in the index has been a function of liquidity and speculation besides the fundamentals. In the recent past, the liquidity and speculation factor has dominated the markets. With margin debt surging to $366 billion in February 2013, the case for speculative activity is strengthened.
Coming back to the main discussion, the charts below give the S&P 500 operating and as reported EPS growth for the last 12 quarters. The growth has been calculated on trailing twelve month earnings.
Both the charts make is very clear that the growth in earnings has been muted in the recent past with the last few quarters showing a decline. Broadly, this is in line with how the global economy has been shaping up. However, it is not in line with how the S&P 500 has been moving.
The point I am trying to make is - There is a recession in the eurozone with IMF expecting negative growth in 2013 and sluggish growth for 2014. U.S. growth remains weak and recent retail data have not been very encouraging. China is in the middle of a medium-term slowdown and the PMI data are reflective of the same. Growth in India has also been muted amidst a policy paralysis.
All these factors do combine to explain the decline in growth in the S&P 500 earnings. Going forward, earnings will remain muted for the same factors. There are no immediate signs that the global economy is recovering or will recover in the foreseeable future.
Also, with a slowdown in China and slowdown elsewhere, the energy and commodity sector is likely to remain relatively depressed. IT sector sentiments are low amidst earnings disappointment in the sector. Apple (AAPL) did disappoint investors and the overall market sentiment to some extent. I would however like to mention here that investors can consider Apple to be a dividend stock more than a growth stock. Also, I would eagerly wait for the new product pipeline, which would roll out in autumn 2013 and in 2014.
Therefore, the fundamental cues are negative for the market at least for the next few quarters. Amidst this, the S&P is trading at a PE of nearly 18 times trailing twelve months earnings. As the global economy remains weak, the "risk off" trade is more likely to trigger a sharp correction in equities. I do personally expect the remainder of 2013 to be very challenging for equities.
However, any correction is a good buying opportunity in an environment of continued expansionary monetary policies. I would therefore consider the remainder of 2013 as a time for stock picking on every meaningful decline.
Some ETFs and stocks worth considering would be -
SPDR S&P 500 ETF (SPY) - It has been proven that beating the index is not an easy task. Therefore, the strategy should be simple -- beat the index or invest in the index. From this perspective, SPY looks interesting. Also, with excess money flowing into risky asset classes, the S&P should trend higher over the next 3-5 years. Therefore, the expected correction can be used to consider fresh exposure to the ETF. The ETF provides investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.
Johnson & Johnson (JNJ) - is a good investment option. I like this highly diversified healthcare company, with products as well as regional diversification. Further, the sector catered to by JNJ is not very prone to economic shocks. JNJ has been a good dividend payer in the past, with a dividend yield of 3.4%. In my opinion, the stock is excellent for a long-term portfolio. It also commands a higher rating than the U.S. sovereign rating.
BP Plc (BP) - is an attractive long-term buy due to several reasons: excellent and diversified asset base, presence across the value chain, presence in alternative investment themes and a good dividend yield of 5.2%. Further, the TTM P/E is at an attractive level of 11.5. Overall, BP is well positioned to take advantage of the long-term appreciation in crude oil prices.