Here’s the thing about a rally that’s three-quarters multiple expansion: you’d better hope earnings don’t disappoint. That’s pretty much all there is to that.
Recall this from Goldman:
Since the market low of 1099 in 2011, the S&P 500 has climbed by 115%. This second phase of the bull market has lasted more than five years and has been driven mostly by an increase in valuation rather than the level of profits.The adjusted P/E multiple climbed to 18x from 10x, explaining 71% of the rise in the index. Higher earnings accounted for just 28% of the rise. After the inflation in P/E multiple, the S&P 500 now trades at the 90th percentile of historical valuation relative to the past 40 years. Current consensus forward P/E of 18.1x is the highest level since 1976 outside of the Tech bubble. The median stock trades at the 99th percentile vs. history.
Ok. So it doesn’t get much clearer than that, right?
But what’s the big deal? Won’t tax reform and fiscal stimulus drive profits higher and justify the lofty price investors are now paying for a dollar of earnings? Well, Friday’s health care debacle seems to suggest the answer to that question is “no.”
Politics aside, the simple fact of the matter is that we just came out of a five quarter earnings recession and if you look at analysts’ record when it comes to revisions, the picture doesn’t look particularly rosy:
So with all of that in mind, you might want to consider the following bit from Bloomberg out Wednesday:
Mystified about how the Trump stock bump keeps surviving presidential setbacks? Look at a pillar of the trade that predates his election.
It’s the revival in S&P 500 Index earnings that began last year and appears certain to accelerate when results come due next month. Evidence is building that companies will make good on forecasts for 10 percent growth in the March quarter, among it a resistance among analysts to lowering forecasts that hasn’t been seen since 2012.
While stocks have been ascending ever since the election, it’s unlikely the rally would’ve gotten this far without the contemporaneous improvement in earnings, which last year ended one of the longest streaks of declines ever in a U.S. bull market. Gains are all but essential for keeping equities aloft with price-earnings ratios approaching 22.
“In our mind, this has been driven more by economics and earnings, and less by the Trump phenomenon,” Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, said in an interview on Bloomberg Television.
For the first time since 2011, hopes for double-digit growth in U.S. earnings aren’t a fantasy. Despite oil’s slump to skepticism over Trump’s growth agenda, Wall Street analysts have been standing firm on forecasts that represent almost twice the profit growth seen in 2013, a year when the S&P 500 rose 30 percent.
Ok, fair enough.
We just have one question. Given the charts shown above, doesn’t this statement contradict itself?…
For the first time since 2011, hopes for double-digit growth in U.S. earnings aren’t a fantasy [because] Wall Street analysts have been standing firm on forecasts.