Macroeconomic Risk? That's So 2012

Fourth quarter earnings are modestly beating expectations, albeit by less than the amount expectations were lowered during the quarter. And while every sector and industry is different, the market seemed to give companies (even with their cautious outlook for 2013) the benefit of the doubt they can manage through a tough demand environment. This may be based on a general belief that the risk of extreme events is dropping. Some “color” from some of the major sectors:

Tech companies selling into corporations saw a little lift in results in the fourth quarter, which many are attributing to a broad “budget flush” on the heels of very cautious spending in the first three quarters of the year. The bullish case for tech investment is that enterprise customers will perceive lower risk of global financial shocks, and expand their list of allowable technology investment from near term must do, to projects and system upgrades that have a good return on investment, but a longer payback period. On the consumer side of tech, things remain tough across the spectrum of goods — PCs, flat screen TVs, smart-phones, etc.

In financials, the interest rate backdrop continued to pressure net interest spreads for the traditional banking business, while the investment banking business enjoyed healthy underwriting and trading volumes, as compared to last year's fourth quarter. Now that credit losses have largely normalized, management focus remains on cutting costs (firing workers) to offset rate pressure, regulatory burdens and litigation expenses. Investors see macroeconomic risks as diffused and are seeing signs that activity levels and volumes may be normalizing capital markets companies.

Healthcare stocks also seem to be getting a glass-is-half-full view. Despite patent expirations at the major pharmaceutical companies, generally lackluster utilization trend in the healthcare system and an incomplete picture of how firms will manage through new legislation, the stocks seem to be taking the view that the companies will be able to work through this tough environment.

In the industrial sector, there is a general sense that, while Europe is still an issue, the U.S. continues to recover and stimulus is starting to take hold in China. Many companies did note an inflection in orders towards the end of the fourth quarter but it remains to be seen whether this was due to an actual pickup in confidence or just normal year end spending and companies taking advantage of bonus depreciation which was set to expire. Guidance attempted to lower expectations for the first and second quarter with a ramp in the second half of the year. This will prove overly optimistic without an acceleration of near-term order trends.

So, is the market rationally valuing and netting out these data points to come up with higher stock prices? Or is it a matter of finding bright spots to justify higher stock prices that have been pulled higher by low rates and higher asset prices in general? I suspect it is a little bit of both.


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