US earnings crumble

US stocks have hit new record highs despite the deteriorating earnings outlook for American companies.

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.

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%.

730-S-P-500

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."

Recommended

The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Markets wobble on second-wave fears
UK stockmarkets

Markets wobble on second-wave fears

Speculation about a new lockdown in Britain saw the FTSE 100 slide 3.4% on Monday, its worst one-day loss since June.
24 Sep 2020
Snowflake: a very special IPO
Tech stocks

Snowflake: a very special IPO

The price of US technology company Snowflake, which floated last week, shot up by more than 150% at one point during the first day of trading.
24 Sep 2020

Most Popular

The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020
Oil producers are back at their Covid-19 lows – is it time to buy?
Oil

Oil producers are back at their Covid-19 lows – is it time to buy?

With demand for oil hammered by Covid-19 and talk of “peak oil demand”, there are lots of good reasons to be bearish on oil producers. So, asks John S…
22 Sep 2020
Why you should stuff your end-of-pandemic portfolio with Chinese stocks
China stockmarkets

Why you should stuff your end-of-pandemic portfolio with Chinese stocks

For an end-of-pandemic portfolio, you need assets that can cope with today’s volatility. And that, says Merryn Somerset Webb, means Chinese stocks.
14 Sep 2020