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Investment Insights: Companies at a Crossroads

February 13, 2013

We believe that without a solid foundation for earnings growth, companies have gotten a hall pass from investors.
-Ron Sloan, chief investment officer, Invesco

Despite a lack of corporate earnings growth in 2012, a surge of investor confidence boosted US stocks. But we don’t believe that type of market rally is sustainable for the longer term. Looking ahead, we expect the market environment to be tougher in 2013 as companies face a crossroads: continue to hoard cash at the long-term expense of future growth, or reinvest in their business at the shorter-term expense of profit margins?

2012: The stock market gets a ‘hall pass’

The S&P 500 Index experienced almost no earnings growth in the second half of 2012. And yet, a burst of investor confidence lifted valuations and led to a market rally — the S&P 500 Index gained 16% for the year.

We believe that without a solid foundation for earnings growth, companies have gotten a hall pass from investors. In this low-growth macro environment, companies have squeezed their operating expenses in an effort to satisfy Wall Street’s demand for greater earnings. We don’t see this as a long-term strategy for success.

 

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