As the corporate reporting season gets under way, investors will be paying closer-than-normal attention to company "outlook" statements to discover whether the current high share prices can be justified by future earnings prospects.
Prices, while off last year's peaks, remain very high by historical standards, so the heat will be on companies to back them up with upbeat comments about what may lie ahead.
An economy growing at three per cent-plus should in theory be supportive of earnings, but strong economic data does not automatically translate into bigger profits.
On the surface, Metro Performance Glass would appear to be a big beneficiary of a booming construction sector, but the company said last week said its earnings would be flat to slightly softer in the current year to March 31.
Sales had recently lagged behind the company's expectations due to a faster-than-expected slowdown in the Canterbury residential market and a short-term drop in activity in Wellington following last November's earthquake, it said.
The question being asked is that if Metro Glass's earnings were flat in a booming construction market, how is Fletcher Building - a bellwether stock for the share market and broader economy - looking?
Statistics NZ said yesterday the total number of homes consented in 2016 was 29,970 - up 10 percent from 2015, and the most for a calendar year since 2004.
Investors will find out on February 22, when Fletcher Building announces its result for the six months to December, the extent to which the company has benefited from the boom.
Fletcher Building's shares so far this year have been soft, trading yesterday at $9.99 against $10.86 at the end of last year.
THE EXPECTATIONS GAME
Across the Tasman, a few earnings downgrades from corporates have emerged, so investors will be wary of the same happening here, Rickey Ward, New Zealand equity manager at JBWere, said.
"Most people are entering the reporting period wanting to look at company's outlook statements to justify share price multiple retention, but they are a little bit nervous that maybe corporates and the market may have baked in too much in terms earnings expectations, which may be at risk given what we have seen across Australia," Ward said.
"The market is priced for perfection in many respects, so we do need these earnings to come through to justify retention of that multiple," Ward said.
"If they don't come through, then you would expect the market to struggle," he said.
"I detect that the market is a bit nervous heading heading into this period simply because the price that we are paying for companies."
Ward estimates the market is trading at a year-ahead price/earnings multiple of 21 times - well ahead of the historical average of 14 times.
The main driver behind the market's strength in recent years has been investors' hunt for returns in a low interest rates environment.
Unsurprisingly, the market's power generator-retailers (gentailers) have been well sought.
It could be argued that a market with a high proportion of gentailers, with their reliable earnings flows, could warrant high multiples, Ward said.
"But do we warrant trading at the multiple that we are at today? That's the great unknown."
"It's not to do with the companies themselves - it's just the price that people are paying for them," he said.
SKY CITY ODDS
The first of the major company to report, casino owner-operator Sky City Entertainment, posted an 18 percent lift in first-half profit as improved trading at its key Auckland casino offset a weaker performance from its Australian and high-roller businesses.
Company will pay a first-half dividend of 10 cents a share from 10.5 cents a year earlier - the first company in a while to actually cut its dividend.
In its outlook statement, Sky City said Auckland, which accounts about 80 per cent of its earnings, was expected to deliver "modest" growth during the second half of this year.
In addition, activity during the second half was expected to be weaker in the company's international business on the previous corresponding period, given reduced visits expected from larger VIP customers and China's crackdown on high roller gambling.
Consolidation and regulation could well turn out to be key themes this year.
On the consolidation front, Spark has launched a $22.7 million takeover offer for communications network company TeamTalk at 80c a share, against 45c before the offer.
In terms of regulation - the market awaits the Commerce Commission's final decision on the Sky Network TV-Vodafone merger and the proposed NZME-Fairfax tie up, both of which are likely to be salient for the companies concerned, and the market in general.