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First-quarter reporting season is nearly past and, for U.S. companies, it can be summed up thus: more of the same, only drearier. Sales growth for companies in the S&P 500 will come in a bit shy of 1.5 per cent, according to S&P Capital IQ – even lower than the draggy average rate for the previous four quarters, 3.8 per cent. Well-managed, bellwether companies missed sales expectations: ExxonMobil, IBM, Oracle, Caterpillar, Pfizer and so on. Companies are still squeezing out operating leverage, and earnings growth in the first quarter was about 7 per cent – better than the previous few quarters but hardly strong.
Analysts, accordingly, are cutting 2013 targets. Yes, estimates for the fourth quarter of 2013 and for 2014 remain cheery. But who cares? On Wall Street, the claim that things are going to be better in six months is as obligatory and as well grounded as the "good" in "good morning."
Yet the market churns higher. The cyclically adjusted price/earnings ratio for the S&P 500 is above 23, against its historical average of 16 and right at its 1901 and 1966 peaks (next and final stops: 1929, then 2000). The combination of wobbly fundamentals and zippy prices has murdered short sellers. If one had bought the 30 most shorted stocks in the S&P 500 at the start of the year, as measured by the proportion of total shares shorted, one would be up 28 per cent, 11 percentage points ahead of the index itself. Much of the outperformance has come from volatile and financially unsteady companies such as First Solar, Netflix, AMD and Best Buy.
This rally has been described as defensive, because sectors such as healthcare and consumer staples have done well. Loose monetary policy and low interest rates are often cited as the key support. Reassuring thoughts, but be careful not to zoom in. Looking at the fundamentals of individual stocks makes the run-up seem indiscriminate and irrational.