Each week on our weekly webinar, we view the latest earnings metrics to see how the fundamentals stack up, because when investors buy stocks, they are buying a stream of future earnings (some may be retained in the company for future investment in growth, some may be paid out as dividends).
As we have reported on more than one occasion: a great number of companies have been buying back their own shares with their cash or borrowed money (and not necessarily investing in future growth) in an effort to continue to push their share prices higher. In the short-term this has the desired effect and shareholders don't complain because they get the immediate gratification of a better share price. CEO's who are compensated on the performance of share price also reap the benefit. However, the long-term prospects for the company suffer.
Without a long-term focus on corporate growth, productivity suffers as well and economies stagnate.
According to Factset: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_4.29.16/view
For the first quarter of 2016: 62% of S&P 500 companies have reported earnings and of those reported 74% have reported earnings above estimate (over the last 5 years 67% of companies "beat" estimates, on average).
At the moment, the blended (both reported and estimated) earnings decline for Q1 is -7.6%. If the earnings decline continues for Q1, it will be the 4th consecutive year over year declines, something that we have not seen since Q4 of 2008 to Q3 of 2009.
The S&P 500 on Sep 30, 2009 was at 1057
It closed Friday at 2065.
Last May, the S&P 500 peaked at a record 2134. At the moment it sits only about 3% below that high.
At the moment, analysts are projecting earnings growth for all of 2016 of 0.8%.
The 12 month forward Price to Earnings (P/E) ratio is currently at 16.8 times (17.1 at the S&P 500 peak last May) and the 5 year average is 14.4 times, the 10 year average is 14.2 times.
Back on Sept 30, 2009, it was somewhere around 12.5 times.
And yet, central banks keep pushing investors toward stocks with aggressively stimulative monetary policy.
Something is going to give and we think that there will eventually be a more realistic re-pricing of equity assets. Cash and government bonds are going to be the safe places to be (not to get good returns, mind you, to protect yourself from this bubble). If your advisor is telling you to "sit tight", you might want to remind her or him about the preferred share "re-pricing" that happened last year (where "sitting tight" has not turned out to be such a great strategy). Or for a more pro-active approach, feel free to get in touch with me and I will talk to you about the High Rock difference.
or check out our (newly updated) introductory webinar :http://www.highrockcapital.ca/about-high-rock.html
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist