The S&P 500 started the 3rd quarter at about 2100 and finished at 2168, up a little over 3%.
Analyst estimates for 3rd quarter earnings per share (for S&P 500 companies) began the quarter at 30.65 and the most recent estimate revisions have lowered those expectations to 29.75, down about 2.5%:
So, fundamentally, for those who buy stocks to be able to participate in a future stream of earnings (which is ultimately what you want to be able to do when you invest in a company), it does not look to me like this relationship is something that is moving in the right direction. In fact, to me, it looks as though it is moving in the wrong direction (which has been happening since 2014, by the way).
The argument from the other side of the "who cares, buy anyway" camp is that you need to get growth and you should buy for the dividend yield.
If earnings are not going to increase, are dividends at risk? Perhaps.
Is that a risk that an investor should be taking?
Not to our way of thinking.
Further, US economic growth, expected at the beginning of the quarter to rebound to better than 3.5%, is now estimated to come in at an annualized growth rate of 2.4%:
This is happening because the consumer, who drove a good portion of 2nd quarter GDP growth has not followed through as expected in the 3rd quarter and business investment remains a negative force.
As I have said on many occasions, uncertainty (and now the US election is driving uncertainty levels) is rising and consumers and businesses, when they are not confident in the future will postpone economic decision making: reducing spending and investment in longer-term productivity.
As share prices rise (for perhaps technical reasons, like low interest rates and fixed income yields), without the fundamental support of earnings growth, the risk that they may fall back to more reasonable values becomes greater.
Needless to say, we have not been convinced by higher share prices that they are a good (long-term) investment at the moment. In fact, we would say that the rationalization for share ownership continues to fade as share prices go higher (and earnings do not support them).
Tomorrow is Webinar Tuesday at High Rock, we will talk about this, the global economy and portfolio strategy and performance (which we continue to provide for our clients, despite our defensive posture) with our clients. We will post the recorded version on our website at about 5pm EDT (well before the Blue Jays vs. Orioles 8pm EDT starting time). So feel free to tune in: http://www.highrockcapital.ca/current-edition-of-the-weekly-webinar.html
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist