And the beat goes on … The S&P 500 will try again today to close over 2000 for the first time in history. Will it make it? It is hard to say, as many still view the market as top-heavy, overvalued, and bubbly, which could mean some profit taking.
- The S&P 500 earned $29.45 last quarter. That’s 11.7% stronger than the year-ago figure of $26.36. It’s also a bit better than the estimates of $29.29 being batted around at the end of calendar Q2.
Do the above numbers suggest companies are not earning their keep in the market? Nope. In fact, the numbers suggest companies are still doing what they have been doing now for some five years – earning money at a decent clip. Yes, I am familiar with the arguments that tell us companies are only making money because of a squeezed labor force and cuts in spending, but that is not really the point, now is it? The market wants to see earnings grow, and that is what they are doing across the board.
- While the dot-com bubble peaked with the S&P 500 trading at close to 30 times annual earnings of its companies, the valuation is about 19 times now, data from S&P Dow Jones Indices show.
As to the bubbly argument, today’s market is nowhere close to the last market bubble in 2000, the one so close to our hearts that most are compelled to use it as a comparison. As well, back then, the US economy was in recessionary mode. Today, it is just the opposite, which suggests that as long as P/E ratio remains below 20 and the US economy keeps on ticking, the market will go higher, as high as it can go before it corrects itself to bring those ratios back in line.
For now, though, the economic data just keeps on giving, as the US economy keeps on getting better, as do earnings.
- Digging deeper into the data, we can see the materials sector had a stellar quarter (growth-wise), with a 43% increase in year-over-year income. Telecom did really well too, with a 35% earnings improvement.
The US economy keeps on getting better because companies have been making money for years, even if that meant squeezing workers and cutting costs. Interestingly, when companies make money, they spend more and hire more people. More people working means more products sold and that means more production, which means more people working and that means more profit for companies. See how simple that is. Really, it is that simple.
- The Commerce Department said on Tuesday durable goods orders, items ranging from toasters to aircraft that are meant to last three years or more, jumped 22.6 percent last month after an upwardly revised 2.7 percent increase in June.
True, private aircraft comprise a huge portion of the above jump in durable goods orders, but is that a problem? Quite the contrary, as somebody has to make, market, and sell not just the aircraft, but all of the parts that make up the aircraft and the folks who market and sell the aircraft and all of the parts that go inside utilize materials and human effort to get the job done, and they are getting the job done to a high degree for sure.
- Transportation orders rose 74.2 percent, the biggest increase ever, boosted by a surge in bookings for civilian aircraft, which soared 318 percent.
Autos contributed to that 74% surge with a 10% increase, which suggests auto manufacturing is doing fine, as is the US consumer who is buying the autos. The point is, the US economy has recently seen record exports and now it is seeing record production and sale of durable goods. The aircraft, BTW, are mostly sold overseas, which means, yup, more exports.
- July’s increase [22.6%] was the largest on record and far outpaced economists’ forecasts for a 7.5 percent advance.
So, with earnings improving some 11% year-over-year and a P/E somewhere between 18 and 19, the S&P is doing just fine, as is the overall market, which is seeing broad-based gains across sectors, which is unlike the market of the 1990s, which saw most of the market rise on the back of technology, specifically, Internet and computer technology.
- Home Prices in 20 U.S. Cities Increased in June at a Slower Pace
The above is good news as well. The housing market is tempering a bit, and it has been a few months. Now, we are moving into the slow season for real estate, which means the US economy has the winter and early spring to keep on improving, which means next spring we could see a surge in the sale of both new and old homes and, as well, a lift in the construction of homes to fill the market demand.
As of this moment, the S&P is four points above 2000 and the Dow is within three points of its all-time high. Not a bad day in the market for a Tuesday, if the current trend holds.
Trade in the day; invest in your life …
