Stephen Gandel of Bloomberg out with a good piece this morning on:
…shares of companies that have reported both better-than-expected profits and sales for the second quarter have barely budged this earnings season. It’s the least fist-bumping investors have done for great quarters in 17 years. – Bloomberg
Is the the beginning of a catch up trade?
Stocks rose during the recent earnings recesssion through P/E multiple expansion and this just may be the market allowing fundamentals to catch up with prices. Nah, that’s too rational.
Too much catching up to do as noted by Howard Marks comments below.
- The S&P 500 is selling at 25 times trailing-twelve-month earnings, compared to a long-term median of 15.
- The Shiller Cyclically Adjusted PE Ratio stands at almost 30 versus a historic median of 16. This multiple was exceeded only in 1929 and 2000 – both clearly bubbles.
- While the “p” in p/e ratios is high today, the “e” has probably been inflated by cost cutting, stock buybacks, and merger and acquisition activity. Thus today’s reported valuations, while high, may actually be understated relative to underlying profits.
- The “Buffett Yardstick” – total U.S. stock market capitalization as a percentage of GDP – is immune to company-level accounting issues (although it isn’t perfect either). It hit a new all-time high last month of around 145, as opposed to a 1970-95 norm of about 60 and a 1995-2017 median of about 100.
- Finally, it can be argued that even the normal historic valuations aren’t merited, since economic growth may be slower in the coming years than it was in the post-World War II period when those norms were established.
– Howard Marks
The market seems to running out of room to the upside as valuations are extremely extended and growth seems to running up against supply constraints, especally labor in the U.S.. Need some quick producitivity gains to nudge non-inflationary economic growth higher and for equity markets to continue their impressive run.
Fits the last factor of the event risk check list of eight reasons why we expect an October sell off, though, we are not expecting a bear market.
More money quotes from the Bloomberg piece:
- To be sure, Wall Street earnings beats are always a bit manufactured. Analysts often lower their estimates toward the end of the quarter, or soon after it, only for companies to hurdle over that lower bar. On average, over the past five years, 68 percent of the companies in the S&P 500 have reported better-than expected earnings. This year the number is slightly higher at 73 percent. Despite the kabukiness of it all, investors have generally seen those positive earnings surprises as good news.
- Through Tuesday morning, 314 of the companies in the S&P 500 have reported their earnings for the three months ended June 30. Of those, 174 had profits and sales that were better than analysts’ expectations. Yet shares of those companies were flat compared with the rest of the market in the 24 hours after they reported, according to research from strategists at Bank of America Merrill Lynch. Five days later, the same stocks performed slightly worse than the rest of the market.
- Since 2000, shares of companies reporting better-than-expected earnings have generally risen about 1.6 percentage points more than the market on the day after they announce earnings. The last time that stocks on average failed to jump on good earnings was the second quarter of 2000, 17 years ago.
- It’s not clear exactly why the cheers for good earnings have been muffled. Savita Subramanian, Bank of America Merrill Lynch’s top U.S. equity strategist, says it’s potentially a bad sign. Investors are overly optimistic, anticipating good news. That can be a sign of a market top. The S&P 500, for example, had not yet peaked in July 2000, even though tech stocks had already started to drop, when companies started reporting their profits for the second quarter that year. The market’s massive slide began the next month. The Dow Jones industrial average closed at a record on Tuesday. – Bloomberg
Consider the big banks. Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. reported better-than-expected earnings per share by 11 percent, 6 percent and 8 percent, respectively. Yet their shares fell on the day they announced their earnings. JPMorgan’s shares are still down slightly. One exception appears to be Apple Inc., whose shares jumped after better-than-expected earnings on Tuesday evening. – Bloomberg
Not a compelling case to make a directional bet, but a great piece to add to your information set. We expect to grind higher through mid-September, which sets up for a decent October correction. This said, realizing market timing has been pretty much a mug’s game.