After a shaky start to the year, stockmarkets have hit new highs. America's S&P 500 index, which usually sets the global tone, has hit a new record around 2,100. Positive data in Europe and optimism over potential deals in Ukraine and Greece have bolstered stocks. Liquidity continues to provide a lift too, of course. According to Evercore ISI, an investment bank, central banks across the world have loosened monetary policy 514 times in the past three years.
All this is just as well as far as the S&P is concerned, because the outlook for US earnings has deteriorated. Around four-fifths of the S&P's 500 firms have now reported their profits for the final quarter of 2014. So far, profits have grown by around 4.1% year-on-year, while sales have expanded by 1.6%. Strip out Apple, and earnings are growing at less than 2%.
The 50% drop in the oil price has hurt the energy sector, which makes up almost 10% of the index. Meanwhile, "the strong dollar is hurting", notes Socit Gnrale's Albert Edwards. The greenback has risen to a ten-year high against a basket of America's major trading partners' currencies. That is undermining S&P companies' foreign sales, which are worth half of total revenues.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Last April, analysts were pencilling in year-on-year earnings growth of 14% in the first quarter of 2015. Now they are expecting a fall of 1.4%. At the start of 2015 the forecast was still 5.3%. Similarly, six weeks ago Wall Street expected earnings growth of 8.1% in 2015 as a whole. Now that has been slashed to 2.6%.
All this would matter less if the S&P weren't priced for perfection. The forward price/earnings (p/e) ratio is at a ten-year high of just under 17. The cyclically adjusted p/e is 26, far above the long-term average of 18. An overvalued market is more vulnerable to disappointments.
"We have a combination of cyclically high profits, a downward trend in [earnings] revisions and above-average valuations," says economist.com's Buttonwood blog. "That ought to be cause for concern."
-
How much does it cost to move home under the Labour government?Home-moving costs are rising and could get more expensive once stamp duty thresholds drop in April 2025
-
What is the 25% pension tax-free cash - and when should you take it?The 25% tax-free cash that savers can take from their pension pots got plenty of airtime in the run-up to the Autumn Budget, with speculation that it could be cut or axed. But, what is it and how does it work?
