Profits welcome but ASX upside has limits As investors digest profit results from 20 per cent of listed companies an early trend emerging is the need to upgrade earnings per share forecasts for 2013, which is the first time in three years. Companies including JB Hi Fi, Leighton Holdings, Commonwealth Bank and Downer EDI have all issued results that have been better than expected, with only a few tiddlers disappointing. It is a far cry from a year ago when investors were nervous after companies came out in droves issuing profit downgrades to the point where analysts - and investors - were left with their pants down. This time around the 48-plus companies that have so far reported - representing 25 per cent by market cap and 20 per cent of companies to report - have either met consensus or outperformed slightly. It has prompted investment houses including Macquarie Equities to start upgrading full year earnings per share by 7 basis points in two weeks. Overall EPS is still expected to be down for the full year but up for industrial stocks. For 2014 the market consensus is that EPS growth will be about 12 per cent, which doesn't support the quantum rise of the stock market. The reality is earnings always lag the stockmarket and this is nowhere more apparent than now. An analysis of profit results by Macquarie Equities highlights that profit margins are expanding, particularly in industrials stocks. While the December Half industrial EBITDA margin of 14.4 per cent exceeds Macquarie Equities pre-reporting season forecast by 2 basis points, there is still plenty of scope for 'productivity improvements' to drive margins higher given they remain well below pre-GFC levels. In the past quarter the ASX 200 index has risen more than 13 per cent in lockstep with global sharemarkets. In the US, Wall Street has gone gangbusters, up more than 6 per cent since the start of the year, while Britain's FTSE is up more than 7 per cent and Japan's Nikkei is up 8.4 per cent. The drive to equities is part of a global "rotation" from bonds to equities. Price-to-earnings ratios have jumped from 10.6 a year ago to more than 13.7 and volumes going through the market have almost doubled. The Australian market might be going up but it is impossible to keep rising at the current rate. As CommSec's Craig James points out, that would involve the market rising 67 per cent over the course of the year. It is highly unlikely that gains of this magnitude will be realised. From here, the market will undoubtedly have some setbacks or face a period of consolidation," he said. But for now, it is the absence of bad news and shift of funds from cash to other asset classes like shares and property that is holding sway. Sharemarkets have bounced higher across the globe as bad news has evaporated and volatility has fallen.