Compared with earlier in this nearly four-year-old bull market, it’s now easier to find headlines about investor sentiment improving. If you believe (as we generally do) in Sir John Templeton’s adage that, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria,” is it time to start looking for this bull market’s exits?
Not yet, in our view, and probably not for some time. Though headlines note a thaw in sentiment, they aren’t universally rosy. What’s more, many of those “sentiment is better” headlines point out investors are wrong to feel optimistic and/or it’s a bad sign of doom to come.
Then, too, a recent survey suggests the heads of America’s biggest firms are cautious about the future. Interestingly, this poll was released just as we discovered Q4 earnings are coming in relatively smoking compared to expectations. Thus far, 336 firms have reported—expectations are now for 5.2% growth over Q4 2011. If “smoking” seems an odd adjective, recall that Q3 earnings grew 0.1%, and 5.2% is better than 1.9% expectations just a month ago. What’s more, 70% of firms thus far report beating expectations, better than the long-term 62% average and 65% over the last four quarters. And revenues are also poised to beat expectations at 3.6% over 2011.
That CEOs are cautious doesn’t seem foreboding to us. In the latter stages of a bull market, we’d expect to see earnings growth slow (maybe even turn negative for a quarter or two!) and become more variegated. This is one reason mega caps stocks tend to shine at such later stages. As earnings growth slows and becomes less broad-based, investors favor firms with less earnings variability. These are the unsexy, boring firms early bull-market adaptors aren’t much interested in. Too obvious and snoozy. But these big, stable firms with multinational reach look more interesting as the expansion matures.
So if you’re a CEO of a firm—even a pretty big firm—but not a mega cap with considerably greater earnings stability, global brand recognition, significant market share, etc., you probably rationally know at this point it’s likely your earnings won’t grow at the clip they were.
Then again, that “just fine” absolute earnings growth is likely to not just beat expectations, but, yes, smoke it by wide margin as they have for much of the present expansion—yet more evidence expectations remain detached from reality. Is it possible that, yet again, CEOs will be surprised (along with everyone else) at the relative resiliency of the economy and of earnings?