Advertisement

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.

Advertisement - Article continues below

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."

Advertisement
Advertisement

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
There are lots of reasons to be bearish – but you should stick with the bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019
MMT: what is modern monetary theory and will it work?
Economy

MMT: what is modern monetary theory and will it work?

“Modern monetary theory” – or MMT – is all the rage among progressive thinkers, especially in the United States. What is it? And does it stand up to s…
14 Jul 2020

Most Popular

OBR: UK house prices could fall by 12% next year
House prices

OBR: UK house prices could fall by 12% next year

The Office for Budget Responsibility says UK house prices could fall by as much as 12% next year. John Stepek looks at how likely that is.
14 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
We’re spending more than at any time since World War II – how will we pay it back?
UK Economy

We’re spending more than at any time since World War II – how will we pay it back?

With the UK spending vast sums on stimulus measures, this year’s budget deficit will be greater than at any time since World War II. The big question,…
14 Jul 2020