Stocks are in Record Territory

Stocks are in record territory, prompting many of us to think through what lies ahead. Pretty much all of the recent gains have resulted from expansion of the market’s PE multiple. In other words, investors have been willing to pay more for the same level of corporate earnings. The Fed has been a big contributor to pushing investors into stocks and other riskier assets through its bond-purchase program.

But will this trend continue even after the Fed is no longer in the bond-buying business anymore? It is perhaps reasonable to assume that absent the Fed, investors will be hesitant to pay up for the same level of earnings. For the market to perform anywhere near going forward what it has done lately, we would need to see a lot more momentum on the corporate earnings front.

The earnings picture isn’t terrible, but it isn’t consistent with a market in record territory either. If the market rally was reflective of fundamentals and not inspired by Fed efforts, then we would be seeing earnings estimates going up, not down. But that’s not what are seeing lately or any time for more than a year now.

When the Q3 earnings season got underway in early October, earnings growth for the S&P 500 in Q4 was expected to top +10%. But as has been happening quarter after quarter lately, estimates started coming down as companies guided lower.

The focus lately has been on weak guidance from big-name retailers like Wal-Mart (WMT), Target (TGT), Gap (GPS) and Best Buy (BBY). But retailers are hardly alone with soft guidance, from Dow Chemicals (DOW) and Caterpillar (CAT) to Cisco (CSCO) and IBM (IBM), a recurring theme has been underwhelming earnings outlook. As a result, estimates for Q4 have been coming down, with total earnings for the S&P 500 now expected to be up +6.7%, down from +11.7% in early September.

Expectations for 2014 still represent a material acceleration in growth pace to +11%. But given what we have seen lately, it is perhaps only a matter of time before they come down to more ‘reasonable’ levels in the low- to mid single digits.

The market’s reaction to the negative estimate revisions in the recent past may not be a good proxy for what to expect going forward, particularly in a post-QE world. What this means is that the market’s outlook beyond its current lofty levels is a lot more cloudy than many people expect.

For exclusive info on hedge funds and the latest news from value investing world at only a few dollars a month check out ValueWalk Premium right here.

Multiple people interested? Check out our new corporate plan right here (We are currently offering a major discount)

About the Author

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were audited and attested by Baker Tilly, an independent accounting firm.

Be the first to comment on "Stocks are in Record Territory"

Leave a comment