Bull Market Shows No Sign of Death With Yellen Support – Bloomberg 12-01-13

Salient to Investors:

Resistance to hiring will help push S&P 500 Index profit margins above 10 percent next year, the highest ever. The 5-year rally has restored $14 trillion to share prices, yet US payrolls remain 1.5 million below the level in 2008.

Michael Holland at Holland & Co said equities will keep rallying as long as the Fed remains more concerned about employment than inflation.

The BEA said the ratio of US wages to earnings dropped to 3.2 in Q2, the lowest since 1966 and down from the highest ratio in 2008 and an average of 4.5 from 1947 to 2008.

Per-share revenue for the S&P 500 rose an average 1.9 percent a quarter since the start of 2009, versus 4.6 percent for the 18 years before that. Analysts expect profits to increase another 10 percent in 2014 amid faster sales growth of 4.1 percent in 2014, twice the rate of 2013.

John Carey at Pioneer Investment Mgmt said weak employment will harm stocks in the long run, even with the Fed’s support, as consumer and business confidence suffers from reading about an economy that just will not get going.

Economists do not expect the Fed to taper until March, 2014.

Mathieu L’Hoir at AXA Investment Managers said analysts are too optimistic about margins and US stocks are more vulnerable to shortfalls in earnings than other countries, and if the Fed succeeds in encouraging hiring, corporate profit margins would likely suffer from higher wage costs. L’Hoir said betting on higher profit margins from here is betting the Fed will fail to boost employment, thus profit margins are currently the risk and weak spot for earnings in 2014 and therefore for U.S. stocks.

Since 1973, annual earnings fell 10 of the 11 times that margins shrank – by an average of 11 percent versus a 16 percent increase in years of expanding margins.

Mario Gabelli at Gamco Investors said investors betting interest rates will remain low in the next 18 months due to a weak labor market may be disappointed if the Fed finds the economy strong enough to raise rates even if employment remains below the Fed’s target.

Analysts estimate margins will climb to 10.5 percent in 2014 and 11 percent in 2015, versus the previous record of 9.8 percent in July 2007, and S&P 500 revenue growth will reach 4.4 percent in 2015.

Ilario Di Bon at Alliance Trust said American companies have been able to resize their balance sheets, to cut costs, and that has proven fairly favorable when we started to see some strong top-line growth, and expects 2014 to be favorable to equities.

Walter Todd at Greenwood Capital Associates said American businesses are positioned to increase earnings even if profitability doesn’t expand because sales should pick up.

Read the full article at http://www.bloomberg.com/news/2013-12-02/bull-market-shows-no-sign-of-death-with-yellen-support.html

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