The great thing about the bottom line is that you can “fake it ’til you make it” – so to speak.
Actually, you can fake it even if you don’t make it. That’s the beauty of the Fed-inspired hunt for yield.
Investors are so damn desperate for any semblance of return that they’ll snap up new corporate supply with the same ferocity that a misguided Trump supporter consumes the latest headline from Breitbart News.
The proceeds from new corporate debt sales are of course funneled into buybacks and when you decrease the number of outstanding shares, you thereby boost EPS and thereby share prices, and thereby equity-linked compensation for management. See, everyone’s a winner!
Well, except for the balance sheet, which is why when you look out across IG and HY, you see record leverage.
Anyway, what you can’t fake is topline growth. You know, sales.
With that in mind, consider the following out this afternoon from SocGen.
With equity valuations elevated and bond yields rising, it is up to profits to make all the running, or more accurately sales. Typically during an economic upswing PE multiples contract as interest rates move higher; nonetheless equities continue to move higher courtesy of EPS growth generated through greater demand. The problem is then demand. Sales growth is now materially lower than in previous cycles, when typically 10.0% sales growth was the norm as opposed to today’s anaemic 3.5%. For EPS to grow as profit margins come under pressure from higher wages and input costs, investors are going to have to hope for higher sales growth.