Add companies with shoddier finances to the list of U.S. stocks that have led the advance since February – a potentially bullish sign for investors waiting for the S&P 500 index to snap out of its paralysis.
Shares of firms with weaker balance sheets are up 24 per cent since markets bottomed in Feb. 11, outpacing their sturdier brethren by 7 percentage points, according to data compiled up until Thursday by Goldman Sachs Group Inc. and Bloomberg. That's the widest spread in two years for a period of that length.
While it sounds like bad news, gains in leveraged companies have generally been a sign of economic confidence. The weak balance sheet group rallied 50 per cent in 2013, beating the 30-per-cent advance in the S&P 500 that was itself the best return since 1997. Value stocks are also outperforming growth shares over the past six months.
"You've seen a much more risk-on appetite since oil bottomed in February, which, to investors, has made it more okay for companies to be leveraged," said Randy Warren, who manages more than $100-million (U.S.) at Exton, Pa.-based Warren Financial Service & Associates Inc. "It indicates people are feeling comfortable with the pace of economic growth.
"We're just melting up right now," Mr. Warren said. "There's no reason to go down, so we're hanging in there, moving slowly higher."
The U.S. stock market's climb has also been aided by data showing steady improvement in the world's largest economy. Citigroup Inc.'s U.S. Economic Surprise Index last month hit its highest level since September, 2014. The gauge, which measures the strength of data relative to analysts' forecasts, has been above zero since early July, a feat it hadn't managed since November.
The signs of improvement, most notably in labour-market data, have emboldened investors to favour industries with higher levels of leverage. Technology shares, which had the highest weighting in the Goldman basket of weak balance sheet companies as of June, have surged 15 per cent since June 27, outpacing the S&P 500's 9 per cent advance. Among the leaders, NetApp Inc. jumped the most in six years Thursday after better-than-estimated quarterly results, pushing its gain since February past 50 per cent.
The broader index's seven-week advance since a two-day rout following the British secession vote has delivered 10 fresh records after more than a year without one, though the rally has slowed in the past three weeks. Valuations remain at the highest levels of the seven-year bull market and recent data have painted a mixed picture on the economy's strength.
At the same time, chances that the Federal Reserve will raise interest rates this year have fallen below 50 per cent. March is now the first month with at least even odds of such a move.
Earnings season is winding down with fewer than 30 of the S&P 500's companies yet to post results. Of those that have, 78 per cent beat profit projections and 56 per cent topped sales predictions. Results have mostly exceeded estimates, though analysts forecast index members will still report a 2.5-per-cent drop in net income, and see a 0.8-per-cent decline for the quarter ending in September.