The market isn’t taking the U.S. Federal Reserve’s rumination on stock prices too seriously.
Twitter Inc. (TWTR) and Amgen Inc. extended rallies in social media and biotechnology stocks since the U.S. central bank said two weeks ago that industry valuations are stretched. The microblogging service rose 20 percent as second-quarter revenue topped analyst estimates. Amgen, the biggest biotechnology company by sales, advanced more than 5 percent after it announced job cuts and beat profit forecasts.
The Nasdaq Biotechnology Index and the Global X Social Media Index exchange-traded fund have both climbed since the Fed’s Monetary Policy Report, which focused on smaller companies in the industries. The advances come during an earnings season in which Standard & Poor’s 500 Index profits have increased 11 percent so far, the most since 2011.
“The Fed really doesn’t do a lot of commenting on groups of stocks, so the fact that they singled out a couple sectors as looking frothy was unusual,” Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, said in a phone interview from New York. “If these companies have the ability to deliver the growth, they’re worth a large premium.”
Twitter rallied after the San Francisco-based company said active membership in the quarter reached 271 million, with year-over-year growth at 24 percent. Sales more than doubled to $312.2 million, exceeding the $282.8 million average estimate.
Amgen reported higher-than-expected earnings driven by sales of Enbrel, the company’s top drug for arthritis. Revenue at the Thousand Oaks, California-based company increased 11 percent to $5.18 billion.
The Standard & Poor’s 500 Index was little changed at 1,970.07. Gross domestic product rose at a 4 percent annualized rate after shrinking 2.1 percent from January through March, Commerce Department figures showed. The median forecast of 80 economists surveyed by Bloomberg called for a 3 percent advance.
“I don’t think there’s anything particularly abnormal with the way the market has priced certain stocks in the biotech and technology areas,” John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., which oversees about $220 billion, said in a phone interview. “The market is just responding to earnings and growth prospects.”
Facebook Inc. (FB), the largest social networking site, and Biogen Idec Inc., the world’s biggest maker of multiple sclerosis drugs, climbed about 10 percent last week. Both reported results that topped analyst predictions.
The S&P 500 has gained 6.6 percent in 2014, extending last year’s 30 percent rally, the biggest since 1997. The Nasdaq 100 Index, which slipped 7.5 percent between March 5 and April 11 on valuation concerns, is up more than 10 percent for the year after climbing 35 percent in 2013.
Procter & Gamble Co. and Exxon Mobil Corp. are among the more than 90 companies in the S&P 500 scheduled to report quarterly results in the next three days. About 77 percent of those that have posted results this season have beaten analysts’ estimates for profit, data compiled by Bloomberg show.
“People pay attention to what the Fed says, but when the market has a lot of inertial force going one way, momentum going upwards, these moves can always extend,” said Frank Maeba, managing partner at Breton Hill Capital in Toronto. His firm manages $620 million. “If there’s another 10 to 15 percent leg up in stocks, people aren’t going to want to miss out.”
Twitter remains down from its level at the start of the year, $63.65, after posting four straight monthly losses of 14 percent or more as lockups related to its 2013 initial public offering expired.
“Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms,” the Fed said in the July 15 report.
Among companies in the 121-member Nasdaq Biotechnology Index, the majority have reported losses in the past 12 months, data compiled by Bloomberg show. Twenty-three of the stocks in the gauge trade with a price-earnings ratio above 30. The S&P Smallcap 600 Index has a multiple of 25.3.
Twitter is projected to post losses through 2017 so it doesn’t have a price-earnings ratio based on general accepted accounting principles. Before the rally, it was trading at almost 300 times analysts’ forecast of profits before items over the next four quarters, according to data compiled by Bloomberg. Amgen (AMGN) shares are priced at about 15 times projected 2014 adjusted income.
Investors are “choosing to ignore what Yellen said,” Terry Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., said in a phone interview. “Valuations are crazy, but they can continue to go high as long as people continue to buy them.”
To contact the editors responsible for this story: Lynn Thomasson at email@example.com