Market Pulse: It’s (still) all about earnings
May 15, 2018
The roller-coaster ride continues with alternating up and down days (or hours) measured in the hundreds of Dow points. Just over a week ago the Dow gained 5 points and the S&P 500 lost 6. Moves barely noticeable, one would think.
Not mentioned on my newscast was that around mid-day the Dow was down 400 points and the S&P was off 36. Stocks were being pounded, then the market rallied. I don't see that changing anytime soon. Nor do I see a big move lower from here. Here's why:
There is a close link between earnings and stock prices. For example, since 1991 there were 11 years in which earnings rose more than 10 percent and in every one stocks rose as well. Estimates for 2018 have S&P earnings rising 18 percent thanks in part to the energy sector, then slowing to 10 percent growth next year and in 2020.
If those numbers turn out to be correct, 2020 earnings will be 43 percent greater than in 2017. That is a very bullish outlook that would shrink the market's currently generous price-earnings valuation to one that would be well below average if prices stay where they are. But prices won't stay where they are.
Investors will push them higher in anticipation of more earnings, exactly what they've been doing in the bull market.
Little noticed in the news with tariffs, Facebook, Iran and all was the CBO's revised 10-year outlook: They expect GDP growth of 3.3 percent this year, the first above 3 percent since 2005 and much stronger than earlier forecasts.
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The tax cuts are the reason. GDP growth will slow to 2.4 percent next year, still a good level. Things are looking up.
Even with faster growth, deficits will rise over the years along with entitlement spending and interest costs, conditions we've known about for decades. Deficits create more and more debt, an unsustainable situation.
The market is not vulnerable to anything other than periodic profit-taking amid trade war or rising interest rate rhetoric as long as investors are onboard with the earnings picture.
If doubts begin to appear, that would be a different story. If they do it won't be because of the trade flap or rising rates, it will be due to a deteriorating economic outlook. I don't expect that.
First quarter earnings were very good, with 76 percent of companies beating expectations. Normally 69 percent beat expectations. CEOs remain optimistic. So do I.
David Vomund is an Incline Village-based, fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.