Friday, November 22, 2013
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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
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
). But retailers are hardly alone with soft guidance, from
), 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.
Director of Research