Sunday, April 6, 2014

The market is booming...in the midst of record profit warnings?

MarketWatch published a short article this morning pointing out an odd fact about the recent performance of the US Stock Market (now approaching 2014's first quarterly earnings reports): the market has largely been making record gains. However, it seems that it is coming in the midst of record profit warnings:

"...a near-record 93 companies in the S&P 500 have issued negative guidance on earnings per share while 18 have offered positive guidance, according to FactSet...Earnings for the S&P 500 are forecast to decline 1.2% in the first quarter, which would mark the first year-over-year decline since the third quarter of 2012, according to FactSet...While that sounds disconcerting, the S&P 500 is up around 72% since September 2011 despite S&P 500 earnings growth over the same period remaining below 10% every quarter."

(For the full article click here)


Do you think this is simply the market continuing to be unstable? Or is it that investors are bullish despite the market actually being only so-so (perhaps as a result of very aggressive intervention by the Fed)?

Take a look at the report and weigh in on the situation.

6 comments:

  1. I actually think the U.S. stock market is pretty fairly priced. One could make the argument that the current PE ratio on the S&P is 3 points higher than the historical average of 15.5, but this figure is an average of of PEs through all interest rate regimes. In Macro, we've learned that investment is driven by interest rates, and when interest rates fall, we have more investment because it's cheaper to borrow, making more investment operations feasible. Since interest rates are unprecedentedly low and the Fed seems committed to keeping interest rates this way until the labor market recovers, I don't think we've truly seen this bull market come into its own yet.

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  2. I agree with Hikaru that the US stock market is fairly priced and we are yet to see true effects. I think the real effect of the bull market will be further pushed by the foreign influence and corporate earnings. We might have to wait little more than expected to understand the 'real story'.

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  3. shifting gears a bit. this struck me as interesting:

    "As far as first-quarter earnings are concerned, it will be interesting to see if weakness in emerging markets translates into a positive for U.S. companies, Belski said. BMO has been looking for that scenario on the idea that emerging-market woes will drive business."

    i am not sure i understand how the woes of emerging markets can mark a positive surge of earnings in the market. maybe i am missing the point but the role of emerging markets to me seems important to stabilize market performance as financial activities continue to span across international borders with the passage of time.

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  4. I agree that the Fed's strong interventionist policies have helped the markets grow and recover (especially last year with the S&P gaining 30%). Eventually though, the growth will have to stem from fundamentals and not government policies like quantitative easing (QE). I'm sure traders and investors are aware of this, and I would hope they have started to price the effects of relaxing QE into the markets (though admittedly it seems that any hint of tapering has negatively affected the markets). Overall, I think the market is certainly more stable than where it was a few years ago, but as always progress can be made to further stabilize.

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  5. I'm not sure. At some point the Fed will pull back on its quantitative easing and easy money will drive up. Then I think there will be a correction in the stock market. But....predicting market movements is a fool's game. You are only right in hind sight most of the time. (the rest of the time, you are convinced of your own genius).

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  6. Shifting gears a bit as well, I think one of the interesting points the BMO official made was that companies need more organic growth to increase their stock price. I think many people see increases in net sales on an annual basis from a publicly traded company and automatically think that the company is growing. Many of these instances the growth is inorganic (mergers and acquisitions that don't create value), which should not increase the stock price. Check out this link to see an interesting graphic of multinational companies that have increased net sales a great deal through mergers and acquisitions. http://www.huffingtonpost.com/2012/04/27/consumer-brands-owned-ten-companies-graphic_n_1458812.html

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