U.S. companies must find way to eke out even more growth to maintain stocks, analysts say.
The stock market shined last year with an epic rally. Now it’s time for corporate America — and the economy — to catch up.
Stocks ballooned 30 percent last year, as measured by the Standard & Poor’s 500 index. But the average company in the broad index only increased annual earnings — the key driver of stock values — an estimated 5.2 percent as the economy grew sluggishly.
For stocks to maintain their gains, market observers say, U.S. companies will have to eke out solid, if not better, earnings growth this year. That’s no easy task with corporate profit margins already at record highs after executives slashed expenses to please Wall Street.
“It’s a squeeze,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “Nobody’s happy about the growth, but the bottom line is [that] these companies are finding a way to do it. Now it’s getting harder. How do you squeeze it more?”
The stock market hasn’t seemed too impressed this year.
The Dow Jones industrial average is down 0.7 percent since Jan. 1, while the S&P 500 index is off 0.5 percent. The technology-focused Nasdaq composite index, however, has gained 0.5 percent.
Wall Street, meanwhile, is losing one major fuel source starting this month: The Federal Reserve is scaling back its massive stimulus program that’s credited with helping juice the rally by luring investors out of perceived havens such as bonds. By keeping interest rates low, the Fed has encouraged investors to chase returns in riskier assets such as stocks.
While few analysts have sounded alarms about a possible stock market bubble, there have been increasing signs that equities are becoming a bit overheated.
“We need 2014 to justify the run-up that we saw last year,” said Stephen Wood, chief market strategist at Russell Investments in New York.
So far, the results aren’t so great.
Company earnings reports for the final quarter of 2013 began trickling in last week, and they’ve been mixed.
Nevertheless, Wall Street watchers generally do not expect the stock market to replicate 2013’s stellar leap this year. Many forecasters predict only modest, single-digit increases for the S&P 500.
Many on Wall Street have predicted a correction: a decline in stock prices of 10 percent or more. To many, such a drop seems long overdue.