Companies actually made more money in 2013 than forecast as evidenced from Wall Street’s top bear UPS raising its 2014 earnings per share target to $117 from 115, said Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC. Earnings grew at a much faster 7 percent annual rate, widening the aggregate S&P 500 base. Hence earnings growth is likely to be lower this year, she said.
Asked to explain the dismal 2.4 percent annualized growth rate in the fourth quarter after a robust 4.1 percent growth in the third quarter, Gina said the investors’ expectations went up following third quarter results even though fundamentals of the economy remained weak.
However, if investors took a broader perspective, not a lot has changed as the economy is still incrementally growing at a slightly faster pace from a year ago, she argued. Asked if equities can grow at the same pace as last year when the economy is clearly showing signs of a slow down, Gina said the markets rallied in 2013 because the economic numbers beat forecasts.
The markets are likely to tread waters this year while consolidating the gains. There may be an upside in April-May if the economic numbers manage to beat estimates despite the Federal Reserve continuing with its current tapering pace. So January and February are pretty indicative of how the markets are likely to perform for the rest of the year, she noted.
Asked if the Fed should maintain the current pace of stimulus reduction, Gina said the Fed is likely to remain on course until it becomes convinced that the recovery has indeed lost steam. If March-April data points fail to meet expectations, then the Fed will probably reduce the pace of tapering.
Asked to predict the market’s movement in 2014, Gina said the markets are likely to tread water and end at where they started the year. Investors need to pick their spots very carefully without being overtly bullish or bearish. Wells Fargo believes earnings are likely to accelerate in certain sectors, which include tech and healthcare, since they have outperformed the market so far this year. Also, financials look undervalued at present time, she noted.
Asked if tech stocks were attractive or overvalued (after Whatsapp’s $19 billion sale to Facebook), Gina said 70 percent of the stocks in the S&P 500 tech index are trading well below their 10 year average valuations. So there are plenty of opportunities to pick from.
Also, there’s an accelerating earnings stream, which is important because tech stocks outperform when their earnings grow at a faster clip than the overall S&P 500 earnings, she observed.
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