Corporate America is usually sluggish coming out of a recession. Not this time though, and a strong corporate sector is at the heart of a bullish call from Jefferies on the potential for the stock market’s rally to keep rolling.
The firm, already calling for the S&P 500 to top its 2007 closing high of 1,565, upped its year-end target for the index to 1,673 Tuesday — about 8% above current levels — in what is perhaps the most bullish take on Wall Street. Chief global equity strategist Sean Darby says corporate spending will be a driving force.
In manufacturing, capacity utilization is at 40 year highs, Darby tells Forbes, while capital expenditures are near 40-year lows. With corporations “burning the candle at both ends,” as he puts it, Darby believes something has to give and the bulging coffers at America’s biggest companies will start to flow a bit more freely.
While the fiscal cliff and sequestration have been blaring across the headlines over the last six months, Darby thinks people may still be underestimating the impact political uncertainty has had on corporate spending.
“Companies have been holding back,” he says, but there are reasons to believe a change is coming. One of those reasons: a recent pickup in deal activity.
The irony of it is that transactions like Warren Buffett’s deal for HJ Heinz or the founder-led buyout of Dell (which still faces stiff opposition from major shareholders) could draw even more money into the market.
The thinking goes that shareholders who want to be in the market will need to put that cash to work elsewhere if they are bought out. Heinz-type deals could be “a real sweetener for the market,” Darby says.
Of course, many have lamented Apple’s lack of participation in the market’s big 2013 rally. The iPhone-maker is down nearly 20% year-to-date. But Darby says the broader market’s rally in the face of Apple weakness should be taken as an encouraging sign.
“It was the darling stock, a must-own last year,” he says, but with market breadth improving and the rally broadening out, “Apple’s downdraft has not had the paralysis-type effect on the stock market you would have seen last year.”
Part of that may be something of a commitment back to equities. While Darby is not in the “Great Rotation” camp — he thinks a big backup in yields will produce some indigestion for stocks when it comes, but isn’t imminent — he agrees with others who have suggested Apple sellers have kept their money in the market, which could explain why the likes of Google have soared during its descent.
There is also Goldilocks element to the market though. What we have now, tepid employment growth and low inflation, is precisely what the equity market wants but perhaps not ideal for the U.S. economy. But because companies came out of the recession in better shape than previous downturns, there is a dichotomy between Corporate America and the American consumer.
Stocks never go up in a straight line though, and with some choppiness creeping into the market in recent days there are murmurings that a long-awaited pullback has finally arrived.
Darby is unconvinced though. He readily acknowledges that the S&P won’t head for Jefferies’ year-end target in a straight line, but he thinks so many managers have been wary of the rally that any stumble will quickly be bought by people chasing performance.
“Few people participated in the rally at the end of 2012,” Darby says, “so we could see a squeeze toward the end of the quarter.”
Another positive sign – even with Apple flailing, retail investors have been moving money into equity funds this year. That gives Darby more confidence in the current rally. “I’m convinced retail isn’t just running away like they did at previous times, like after the Facebook IPO,” he says.
“‘Buying the dips’ is the adage of the moment,” Darby adds, and he expects it will remain the case.
Corporate America Has The Fuel To Keep Stocks Flying – Forbes