7:44 p.m. EST January 9, 2014 NEW YORK For Wall Street in 2014, it's all about the "E," as in earnings growth.Indeed, the stock market boom of 2013 was fueled by a friendly Federal Reserve and investors' willingness to pay up for stocks despite sluggish earnings growth. In 2014, however, peppier profit growth will likely be needed to fuel the next leg up in stock prices.
The main investment thesis for stocks in the new year is that an expected acceleration in U.S. economic growth will offset less Fed support and boost corporate profitability. Growth, it turns out, is also good, if not necessary in 2014, in Wall Street's eyes.
That bullish combination, Wall Street hopes, will provide a fresh tailwind for a stock market that gained nearly 30% in 2013 and which is no longer cheap. The benchmark Standard & Poor's 500 index is now trading at 16.8 times its past 12-months earnings, says Thomson Reuters. That is in line with the 10-year P-E average, data from S&P Dow Jones Indices show.
The profit-reporting season for the final quarter of 2013, which kicked off after Thursday's close with aluminum giant Alcoa posting results that missed expectations, could show if the growth pickup is already materializing. Also key: what CEOs say about the outlook and whether they think the economy will exert enough mojo in coming quarters to juice profits.
This earnings season "will help shape expectations for 2014," says Nicholas Sargen, chief investment officer at Fort Washington Investment Advisors. Analysts expect profit growth of 10.8% for 2014, vs. a rise of just 5.7% last year.
"The real issue for me on the profit story is that the stock market is pricing in an acceleration in profits in 2014," says Sargen. "Nobody was calling for the acceleration to start in the (final quarter of 2013). And if it is happening earlier, than I am more confident that I will see it in 2014. If it doesn't materialize, then maybe the market is vulnerable to disappointment."
Currently, Wall Street is expecting profit growth of 7.7% for the final quarter of 2013, which would mark the fastest earnings-per-share growth in almost two years. Earnings grew at a 8.4% pace in the second quarter of 2012.
Lance Roberts, chief strategist at STA Wealth Management, warns that profit estimates for the just-ended fourth quarter are "pretty aggressive" and that CEO guidance might not be as upbeat as investors expect.
In contrast, citing improving business fundamentals, a bullish John Stoltzfus, chief investment officer at Oppenheimer, expects "positive earnings surprises to overwhelm negative ones."
A better-than-expected earnings season, Stoltzfus adds, "has the potential to reinvigorate the stock market and inspire investors to continue to stay invested in equities."
The earnings season has been bullish for stocks since the bull market began in 2009. Nearly 80% of the S&P 500's gains in the bull have come during the six-week period spanning the two weeks before Alcoa's earnings report and the four weeks after it, according to LPL Financial.
