There hasn’t been much in the financial news lately about earnings. That’s too bad because of all the things the market cares about, or should care about, earnings top the list, or should top the list.
- … there are about a zillion ways to measure stock market valuation. Therefore, like art, the judgment of whether or not stocks are “expensive” or “cheap” usually lies in the eyes of the beholder.
The above might be true, well, it is true; the players in valuation industry have come up with a zillion zany ways to tell us what is what with the stock market, but the fact of the matter is the market ultimately cares about one thing – earnings.
Oh, sure, it might not show it all the time, like recently for instance, but in the end, if a company is not making money, its stock will go down. Conversely, if it is making money, its stock will go up.
Simple, but the market is a fickle beast to be sure, so “simple” doesn’t always apply to the market. It often behaves in a way that is abnormal, irrational if you will, thanks to various and sundry issues that pop up constantly.
- Geopolitics, concerns about the fed — when do they finish tapering, when do they begin to normalize rates — these are all new uncharted waters that the market has to navigate.
The above sum up the current market issues and we have the breathless media, celebrity analysts, and hilltop screamers to thank for contributing to much of the market’s irrationality regarding these issues, but the one not mentioned, the one played up right and left in the financial media is valuation – the market is overvalued. But is it?
Lately, the market has been irrational, or at least to the point it needed to be, meaning, it often rebalances because valuations are not where investors would like to see them. I am referring to earnings and their relationship to price (P/E) as the basis for my use of the word “valuation.” Currently, or at least prior to this earnings period, valuations were a bit high for the S&P 500. Upwards of 18, I believe, which is a higher than normal number.
Well, that is all about to change. In about three weeks, the market will be back in full swing. The teams of real investment analysts will be back at work after a summer of frolicking to let off steam and this means more volume.
Now, what do you think these fundamental analysts will be looking for when they are scouring the universe of available stocks? Well, my guess is they will be looking for fair valuations, and here is the kicker. Aside from all hoopla about this or that market problem, they will be looking at companies that are making money, and there seems to be plenty of those.
- About 90% of the companies in the S&P 500 have reported earnings so far for the second quarter. Nearly three quarters of them were better than expected. That’s a very high percentage, and it’s being driven largely by performance.
In fact, not only are there plenty of companies making money, but they are doing it better than they have been in a while.
- In the end, earnings are expected to be up 9.9% over last year, according to S&P Capital IQ, which compiles estimates from Wall Street analysts.
This, of course, is directly attributable to the improving state of the US economy, and this, of course, is directly attributable to consumer spending, and this, of course, it directly attributable to higher employment and higher wages.
So, in the end, the market might be volatile and scary at times, but it is not a time to panic or even be afraid, really. Yes, Russia is acting out, but my guess is Putin will out the bear back in its cage before too long. He has an economy to worry about.
- Russia’s Economy Ministry is forecasting $100 billion in capital outflows for this year, up from $61 billion in 2013, but that looks optimistic. Indeed some think that figure has already been exceeded.
Even if he invaded Ukraine, what on earth would he do with it? The Ukrainian economy is in worse shape that Russia’s and all it would be is a further drain on an economy looking at the brink of collapse.
So, keep your eye on the ball, not the fast moving cups the breathless media spins about. Keep your eyes on the money, that is, the money companies are making or not making.
Trade in the day; invest in your life …
