Advertisement

Chart of the week: US stocks outrun profits

The US stockmarket has become totally detached from underlying profits of its constituent companies over the past three years.

US profits and S&P 500

Investors beware, says Albert Edwards of Societe Generale. America's equity market "has become totally detached from underlying profits" over the past three years. The chart shows the S&P 500 index in relation to the level of national pre-tax profits measured in billions of dollars (so they are currently around $2 trillion). This is the gauge used in the US national accounts, as opposed to the endlessly manipulated quarterly earnings figures US corporations like to present to Wall Street. A large gulf has opened up between official companies' earnings and the level of the stockmarket index. "We saw exactly this disconnect in the late 1990s tech bubble and we know how badly that ended!"

Viewpoint

"Imagine a stock that [boasted] margin expansion and earnings-per-share [EPS] growth, but had got cheaper... this scenario is reality, but on a regional basis We looked at three components margin expansion, multiple expansion and other EPS growth to determine total returnacross four regions over the whole cycle: the US, Japan, Europe ex-UK and emerging markets the US experienced growth in all the three components of return. Emerging markets have [seen] margin contraction, but at least the multiple got cheaper. Europe [has become] more expensive via multiple expansion, while experiencing a contraction in margins and other EPS growth. The standout... is Japan [with] margin expansion of 2% annualised, and other EPS growth of 0.75%, while multiples have fallen by 2.75% Japan is becoming cheaper despite having got operationally better."

Advertisement - Article continues below

Man Institute

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
James Montier: valuations are way too high
Investment gurus

James Montier: valuations are way too high

The market is completely discounting the risk to the economy and operating as if there is nothing to worry about, pricing in a V-shaped recovery, says…
10 Aug 2020
Should Big Tech be broken up?
Tech stocks

Should Big Tech be broken up?

The dominance of the big four technology giants has attracted the attention of politicians determined to humble them. But what real harm are they doin…
8 Aug 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020