“A so-so first-quarter earnings season hasn’t dented investors’ enthusiasm for stocks.
Profit at large U.S. companies modestly exceeded Wall Street analysts’ expectations, while revenue was weak and many companies ratcheted down growth projections.
But stock prices have been rising, with the Dow Jones Industrial Average up 16% for the year and 4.2% since earnings season began April 8 with a mixed report from aluminum company Alcoa Inc. AA 0.00%
The developments have added up to a rise in stock-market valuations. The price/earnings ratio on the Standard & Poor’s 500-stock index now stands at 14.5, its highest level since 2010.
Stock-rally skeptics said that spells trouble. They contend soft U.S. economic growth and expanding P/E multiples can’t coexist forever. Economists predict U.S. gross domestic product will expand at a slower rate in the second quarter than the first, when it increased at a 2.5% annual rate. Government spending cuts known as the sequester came into effect March 1. The Labor Department said Thursday that initial jobless claims increased by 32,000 to a seasonally adjusted 360,000 in the week ended May 11, the largest one-week gain since November.
Ahead of the Tape
But many market watchers emphasize there are few other options available for investors. With the Federal Reserve committed to buying $85 billion a month in bonds for the foreseeable future, pushing down interest rates and reducing the income investors can make on assets perceived as safe like Treasurys, many will likely continue pushing into stocks, betting that the economy will continue to improve. “Revenue is not good,” said Adam Parker, chief U.S. equity strategist with Morgan Stanley MS -1.14% . “But people are giving companies a hall pass for that, because most believe that companies will do better in the second half of the year.”
Longtime bulls have been waiting for years for investor confidence in the rally to pick up. Even as shares soared off their March 2009 financial-crisis lows, investors sent only a trickle of cash into stocks despite a recovery in corporate profits. But that has changed this year with the pickup in the stock market and the rise of other riskier asset classes such as “junk” bonds, those issued by below-investment-grade companies.
The increased flows come as the corporate-earnings recovery has plateaued…..”
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