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US Equity Investors Ignore Warnings

Michael Mackenzie and Vivianne Rodrigues | Tuesday, April 01, 2014
Source: Financial Times
 
As US equity investors bid adieu to the weakest first quarter in 5 years, few are dwelling on the lackluster performance.
 
Indeed, many appear to be ignoring any warning signs about the economy’s prospects: a disappointing 0.5% gain on S&P 500 in the first 3 months, set against the strong performance of long-dated bonds since January. More than ever, with the equity market bull run in its sixth year, there is optimism that stocks will enjoy further gains.
 
The bull case for equities largely comes down to 3 factors. These are expectations of a stronger economy later this year, monetary policy remaining highly supportive; while the return of retail investors is only in its early stages.
 
Such thinking by investors means disappointing data and a sharp reduction in first-quarter earnings growth estimates for S&P 500 companies is being played down, while the recent turbulence in biotechnology and internet stocks is not seen as a sign of brewing trouble, rather a healthy correction.
 
Carmine Grigoli, chief investment strategist at Mizuho Securities, expects the S&P 500 will reach 2,075 by late summer on the back of stronger profit growth. 
 
“The crucial issue for the stock market is whether we see the economy accelerate during the second half,” he says. For now, both bond and equity investors are in a state of suspense until May, when they can gauge whether the tone of data for April confirms a rebound in activity after the harsh US winter.
 
“The first quarter [for the economy] is clearly a write-off. We need to wait until we see April’s data,” says Andrew Milligan, head of global strategy at Standard Life Investments.
 
Before the widely expected spring rebound, there is the matter of the first-quarter earnings season in the coming weeks. Expectations are grim.
 
Analysts have cut sharply their expectations for S&P 500 earnings growth since January to minus 0.4% from a year-on-year rise of 4.4%, according to FactSet. Yet, they see first-quarter revenues expanding 2.5%, so the contraction in earnings suggests companies are facing higher costs.
 


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