340 of the companies on the S&P 500 have reported Q3 earnings so far: 76% have reported earnings above the mean estimate (the 5 year average is 72%) and 47% have reported sales revenue above the mean estimate (the 5 year average is 57%).
The blended earnings decline is 2.2% (the estimated earnings decline at Sept. 30 was 5.2%).
Analysts are estimating earnings for Q4 will decline by 2.7%.
The reasons given for earnings declines: slower global growth, stronger $US and lower oil prices.
With earnings declining and stock prices rising, the Price to Earnings (P/E) ratio is rising (making stock prices more expensive).
The 12 month forward P/E ratio is 16.5, this is compared to the 10 year average of 14.1.
If, as I suggested in last Wednesday's blog, Corporations are reducing the supply of shares available through share-buy backs, the per share earnings levels will are being inflated making share prices even more expensive.
The purpose of investing in companies, buying their common shares, is to be able to share in the growth of that company over time.
If companies are not able to grow revenues and earnings, this should be reflected in the value of their shares.
Clearly there are other forces at work when share prices rise while earnings fall (more buying than selling), but as investors we might want to ask ourselves how long this can remain realistic.
The great economist John Maynard Keynes once wrote: "the market can remain irrational longer than you and I can remain solvent", so one should not necessarily be "short" the stock market.
However, investors should be wary of the current state of market irrationality that is not based on value but on lots of cheap money chasing too few available assets.
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist