Among the most popular investment ideas for 2014, there are US shares. This belief is based on three fundamental pillars:
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recovery of the economy;
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profit growth;
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valuations in line with fundamentals.
Yet the preliminary estimate of GDP has disappointed expectations (0,1% annualized, compared to 2,6% in the previous quarter), the dollar is struggling to appreciate permanently and the market continues to favor European stocks (particularly those of the "periphery", such as Borsa Italiana).
The glass appears to be half full. For 91% of the companies making up the S&P500 index, the first quarter of the year ended in line with a gradual improvement in activity. Indeed, in aggregate, both revenues (+2,7% y/y) and earnings per share (EPS, equal to 2,2% y/y) grew compared to the first quarter of 2013, also beating expectations.
The overall revenue growth rate improved from the prior quarter, but the number of industries where earnings per share grew worsened. However, if we exclude some specific aspects related to single actions, the results are quite homogeneous. We see two opposite cases.
The 30,9% EPS growth for the telecom sector (left) is largely attributable to Verizon; if we exclude it, the sector's EPS falls to 1,0%. At the opposite extreme (right), excluding two giants such as Bank of America and JP Morgan from the financial sector, EPS growth improves significantly (from -3,0% to 6,0%).
If we don't limit ourselves to the 500 companies of the S&P500 index, but consider a broader index, made up of 3.000 US companies of all sizes (Russel 3000), the overall results continue to be encouraging: revenues + 3,8% and profits share +3,7%.
Furthermore, reading the various reports of the conference calls between analysts and management during the presentation of the corporate results, the bad weather factor appears with assiduous regularity: this suggests that the results could have been even more convincing. In any case, the "tone" of these relations is overall positive, both with regard to the USA and in the recovery in Europe.
With the S&P500 index nearing all-time highs, market participants' views are increasingly divergent. The Bullish (those who expect further rises in share prices), are convinced that the recovery will already start from the second quarter, while the Bearish (the bearish) dwell on the weak points of the US economy (private debt and unemployment ).
What will happen in the end - unfortunately - I don't know, but to avoid incurring the so-called "confirmatory bias", i.e. focusing only on the facts that confirm one's thesis, it is better to keep the bar straight. Therefore, remain true to our investment process, which includes careful risk management, together with a value approach in the selection of stocks and asset classes.
According to our analysis tools, the financial climate remains supportive and prices are adjusted to fundamentals. If we really want to be honest, there are more risk factors in Europe than in the USA.
In conclusion, all the conditions are in place to keep US equities in the portfolio.
