This Index is Too Hot, This Index is Too Cold as Stocks End Mixed

There was something a bit off key about the stock market’s performance today, as the S&P 500 rose and the Dow Jones Industrial Average as Coca-Cola’s (KO) rise was outweighed by Goldman Sachs’ (GS) drop.

Bloomberg News

The S&P 500 gained 0.3% to 1,843.80 today as Boston Scientific (BSX), Dow Chemical (DOW) and Biogen Idec (BIIB) rose. The Dow Jones Industrial Average slid 0.3% to 16,414.44.

With no economic data to hang our hats on, we’ll just have to chalk up the mixed message to the difference in index composition and the vagaries of individual stock movements. While Coca-Cola gained 1.6% to $39.92 and Biogen jumped 4.4% to $310.50 today with nary a catalysts in sight, Goldman dropped 1.8% to $173.20 as its post-earnings weakness continued, Dow Chemical rose 6.6% to $45.93 on reports that Daniel Loeb’s Third Point has taken a stake in the company and Boston Scientific advanced 3.5% to $13.98 after it was upgraded by Piper Jaffray.

Earnings are still front and center, and so far they’ve been mediocre. Revenue, however, has been another story. Merrill Lynch’s Savita Subramanian and team explain:

Overall, 44% of companies have beaten on EPS, 63% have beaten on sales, and 37% haven beaten on both. This compares to beats of 45%, 42%, and 23%, on EPS, sales and both at this same time last quarter. The proportion of companies beating on both metrics and on EPS alone ticked down from last week, but the sales surprise ratio was unchanged. If it holds, this would mark the best quarter for sales surprises since 1Q12, suggesting that sales forecasts may finally be bottoming after persistent downward revision trends.

Still, Morgan Stanley’s Adam Parker and team are feeling pretty confident that investors will pay more for those earnings:

If managements remain constrained in capital spending, hiring, and inventory, we can continue to feel confident that an earnings collapse is not imminent. A 20x market multiple might seem like fantasy land, but it isn't impossible if growth modestly improves, the Fed convinces the market that it is nowhere near moving the front end, and management teams remain conservative with spending. For now, we see the risk-reward as positive for the market, even with only modestly further multiple expansion. We admit that we might be too wimpy. Maybe we should buy a lottery ticket and enjoy that private 30 seconds of dreaming about winning the mega-millions – or take a nap and dream about surprisingly high multiple expansion.

Deutsche Bank’s David Bianco and team consider what would have to happen for P/Es to head higher:

Earning season should solidify $120 as 2014E S&P EPS, putting the S&P at 15.4x forward EPS. We’re confident in 8-10% EPS growth in 2014, so instead we see the main uncertainty as the PE. We have long argued that dividends are a tangible connection between PEs and interest rates. If payout ratios rise (as we expect) and long-term real rates climb, but plateau below history’s average (still uncertain), it justifies a higher S&P PE.

That’s a lot of ifs, but stranger things have happened.