…last year the earnings growth of the underlying companies was 5%, yet the index grew nearly 30%. Because of this divergence the s&p is overbought and will return to a more normal level"
thoughts on this comment?
That’s what every single Q1 market outlook said. I have a stack of them right next to me and they all say the exact same thing. “Last year was about multiple expansion, this year we need to have earnings growth. Provided we do, we should see high single digit returns for the S&P.”
Which, if you think about it, is exactly the way it works. Earnings are lagging indicators, so last year’s run up was in anticipation of strong earnings this year. It doesn’t mean the market is overbought at all. Just means investors are expecting the recovery to continue and possibly pick up a bit.
If you just looked at multiple expansion in a vacuum and decided stocks are too rich, that’d make you a pretty poor investment analyst. And, P/E multiples are barely above the long term average anyway. Basically, whoever said this is probably better suited to be my barber than work in the financial services industry.
^ LOL, yes
Of yearly PE’s since 1872 of S&P, we are in the 87th percentileish. I think that’s more than “barely” above long term average.
That’s right, but what about all the other metrics? My barber told me to watch EV/Sales but what does he know
Is market data from the 1800’s useful? If not, when do we start the charts?
Personally, I don’t like academic research that cites P/E ratios or any other market characteristics from so long ago. But I admittedly don’t know the best timeframe to use when completing a study or analysis.
Anyway, the market certainly seems a bit overvalued on several metrics right now. But as others have said, that’s pretty much the consensus right now, so we will probably continue to climb from here. Who knows. Market timing is a tough game.
Well, if you exclude the dot com bubble, we are well into the 90th decile in terms of valuations. You don’t have to go back to 1872 to conclude that. You’ll get similar answers if you just take post-war data. But maybe this time is different.
The demographics of the baby boom generation probably has helped float the PE higher than normal over the last 30-40 years. How long that can last is up for debate, but it can be a while before valuations revert, that’s for sure.
the consensus is that S&P 500 earnings will grow 30% this year, as was the consensus for the past 2 years where we saw 5% growth. 30% is clearly excessive and expect another 5% year. considering all cost cuts that could be made were done 2 years ago and GDP growth is 2-3%.
of course there will be a stock market bubble when every company on the planet is buying back 5% of their stock every year after a 4 year rally. every analyst and corporate raider is forcing these companies to take on debt and buy back stock. this rally will keep going until a meaningful enough negative catalyst comes around to scare these companies into stopping their buybacks. the companies themselves are the incremental buyer in this rally. not every bull market needs joe sixpack to join in order for it to become a bubble. all of joe sixpack’s cash is on joe company’s balance sheet because joe company wouldn’t hire joe sixpack to sell spaghetti strap shirts.
I agree with MLA here: cheap debt has fueled share buybacks that are driving the market upwards. However, I also think we’ll see typical investor momentum behavior and we’ll see people continue to drive it higher chasing gains. The catalyst for companies to stop doing buybacks is either heightened valuations, more expensive debt, or both (probably). The question, as always, is the timing, and timing interest rates is notoriously difficult. Better to watch and be ready to pull the sell trigger once we have more info.
Not sure where you are getting numbers from. 30%? Consensus view on EPS has never been that high. Bloomberg shows S&P 500 earnings y/y growth of 9.08% in 2014, 10.54% in 2015, and 10.49% in 2016. S&P 500 earnings grew 2.5% y/y in 2012 and 7.4% y/y in 2013.
Also, there was a Wall Street Journal article on Friday about how insiders are more bearish today than ever since 1990 as evidenced by insider sales. Yes, some companies are leveraging up to buy back stock and that might be evidence that they are seeing some near-term ceiling on organic earnings expansion, but I would say that there are far more insider sellers than buyers in tihs market.
Two things:
First, I was agreeing the MLA about the share buybacks being the incremental buyer up until late last year. I can’t comment on those consensus profit forecast numbers.
Second, we are talking about company sharebuybacks, not insider selling. Companies have most definitely been increasing share buybacks with debt and balance sheet cash. If insiders are essentially selling their shares to their own companies…we’ll that raises my eyebrow.
OK, well I think we actually agree that the fact that companies are using cash to buyback shares suggests that the opportunity costs of not re-investing in the biz are fairly low, which historically speaks to growth opportunities potentially topping out. My comment on insider selling (as opposed to corporate repurchasing) actually affirms my overall sentiment that the equity market is frothy. However, as long as credit spreads remain tight, there’ll continue to be an inflow into equities.
I would say the combination of insider selling and stock buyback are very negative.
On an individual company level, I haven’t found insider selling to be really indicative unless it’s very significant and quirky (see Big Lots). Some are just perennial sellers. However, having lots of insiders selling as opposed to buying is obviously incrementally negative, especially on a market-wide basis.
Stock buybacks by themselves are pretty good… but when you’re buying back due to lack of growth initiatives (as you mentioned) combined with needing to manufacture EPS beats it gets pretty bad. It deteriorates the balance sheet and actually burns equity value when you’re purchasing 90c for $1 (assuming overvalued).
I don’t know where 10% earnings growth is going to come from given margin levels. You need actual top line growth to get there… which seems very hard to come by these days.