07/24/09 Vancouver, British Columbia
In the market this week, it’s earnings, earnings and earnings. The Dow rallied big yesterday, up 2.1%, straight through 9,000, to its highest level since November. The S&P and Nasdaq were even better, up closer to 2.5%. Just as in the rallies over the last two weeks, blue chip earnings led the way… surprises from 3M, Hershey’s, eBay and Ford grabbed the spotlight this time.
Today won’t be so pleasant. It was Amex’s, Microsoft’s and Amazon’s turn to show their second-quarter hands today… and keeping with poker parlance, they were holdin’ rags. The market is consequently just below break-even as we write.
“The broad stock market,” writes Dan Amoss, “doesn’t see a difference between earnings achieved by cost cutting and earnings achieved by sales growth — especially in the consumer discretionary sector. Earnings achieved by cost cutting tend to be one-time in nature. These do not deserve higher multiples. The latter — earnings driven by sales growth — certainly merits higher multiples. We have seen very little of this, outside of unique companies like Apple.
“This is very important to keep in mind, because the rally in the market since the March lows is entirely driven by expansion in price-to-earnings multiples, not growth in earnings. This type of rally is fine if we’re at a trough in earnings and earnings are about to come roaring back as the economy recovers. But this type of earnings recovery is not going to happen. In the consumer discretionary and financial sectors, the market has gotten way ahead of itself. I expect this to correct itself as the fall season arrives.”
Ian Mathias
Ian Mathias is the managing editor of Agora Financial’s Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report – Agora Financial’s flagship income investing advisory.
Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He’s also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he’s not at work, you’ll probably find Ian on a bicycle, racing up and down the “mountains” of Baltimore County. Ian has a BA from Loyola University in Maryland.
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I disagree. I think we’ll see the Dow at 10k by mid September and close to 12k by EOY. S&P is right around it’s historic range of 16 p/e on an inflation adjusted basis. So stocks are priced correctly with room to run. What’s going to stop tech?? Obviously, the demand is there and enterprise spending is up. I only see growth ahead.
what happens when others balk at buying US debt?
Oh, Oh, Oh, I can answer that….we will buy our own debt, and my TBT will go nowhere to down. Just my luck. Snookered again by the people that make and change the rules of the game. But I am not bitter.
Plunge protection team anyone?
sure, buy stock!!! suckas!!!! pure gambling at this stage. no earnings!!!
no growth, high unemployment, hahaha
stocks have nothing to do with earnings/ pe/ etc. They are a legalized paper mechanism for printing money and handing it to the population…
they have nothing to do with “value”
An inflation adjusted price/earnings ratio of 16 bodes well for you if and only if there is substance, such as sales growth, behind those numbers. With a real unemployment rate, based on historical Bureau of Labor Statistics parameters, at in excessof 16%, the price/earnings ratio data is skewed.
that 16 p/e is for the last 4 quarters with the first two of those hardly reflective of current 20+% unemployment and prior to 2 trillion dollars of deficit….if you are an astute time series statistician you would probably weight the nearer events more heavily than the remote….as such p/e ratios are closer to triple digits….and please don’t spew that crap about the stock market being forward looking since it didn’t have a clue about the current down turn….and then explain about 2 trillion usd of bad real estate is going to be handled and how falling real estate prices is good for stocks….
the market may keep rising – it’s certainly higher than i ever expected…but the fundamentals are not there….
fundamentals are the key ! That is what we were taught right!