“Although the market has significantly appreciated, it was significantly oversold heading into that rally,” Eric Teal, chief investment officer at First Citizens BancShares Inc., which manages $5 billion in Raleigh, North Carolina, said in a June 13 phone interview. “Corporate earnings have really been the drivers of higher stock prices up to this point, and if we anticipate economic growth then the market can continue to do well.”
Utilities, which have dividend payouts about twice as high as the S&P 500, slumped 5.8% since May 21 as rates on 10- year U.S. notes rose as high as 2.29% on June 11. Oneok, which yields 3%, plunged 10% since May 21. The stock trades at 35 times reported earnings. FirstEnergy, a nuclear power plant owner, has a dividend yield of 5.7% and is down 13% since Bernanke’s comments to Congress.
Phone stocks, which also pay high dividends, are the most expensive industry in the S&P 500. Windstream Corp., the landline telecommunications company that has the highest dividend yield of the S&P 500, has lost 5.5% since May 21. The Little Rock, Arkansas-based company is 33% more expensive than the S&P 500, with a price-earnings ratio of 21.1, according to data compiled by Bloomberg.
Stocks whose earnings are most tied to economic growth have led gains this quarter, with financial shares up 7.1%, a sign investors are betting on more growth and consumer spending. Morgan Stanley, in New York, advanced 18%, while Fifth Third Bancorp., Ohio’s largest lender, rallied 12%.
Economists are more optimistic about the economy in the next two years, with the median forecast at 2.7% for 2014 and 3% for 2015. GDP has expanded an average of 2.1% a quarter since the recession ended in June 2009, less than half the average in recoveries since 1945, according to data compiled by the Commerce Department and Bloomberg.
“The Fed is clearly going to wait and gauge the sustainability of the economic recovery,” Teal said. “And the improving economic growth signs outweigh the monetary tightening impact. That will likely be the case this time.”