After stronger than expected employment growth in July in the US, stock markets got rather happy:
And on the CNN Money Fear and Greed Index, greed is running hot.
Behind the scenes, where the (perhaps boring) fundamentals reside, it is not so very pretty:
For the 1st quarter of 2016, S&P 500 companies reported a decline of 6.7% in earnings growth. With 86% of companies having reported for the 2nd Quarter, the "blended" (actual results plus expected results for remaining 16%) declined by 3.5%.
Valuations (and other metrics for measuring them) aside, if companies cannot grow their earnings, why are their stock prices growing?
There is more:
For the 3rd quarter of 2016, analysts have (again) lowered earnings estimates to a 6th consecutive quarter of declines with an anticipated decline in growth of 1.7%.
4th quarter estimates have also been lowered to + 5.37%, which would bring the year to an estimated decline of 0.3%.
At the beginning of the year earnings growth were expected to increase by 6%.
S&P 500 stock prices (now at record highs) are positive by close to 7% this year, with negative earnings growth.
There is a disconnect here.
Sorry folks, if you are looking for value, it is not in the stock market.
In a discussion with a new client on Friday he said "nothing seems to make sense anymore...", he will not get an argument from me. When it doesn't make sense (and according to the great economist John Maynard Keynes, things can remain illogical for some time into the future), stay away!
Unfortunately, the "short positions" in stocks may have to be resolved (bought in) in the interim (which was certainly happening on Friday), so there is some further upside potential, but don't get caught up in the emotion!
Finally and completely off topic, congratulations to my friends, Glen and Nick Hoag who have helped bring Canadian Men's Volleyball back to the Olympics and started out with an upset over the US team yesterday!!
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist