Michael Gouvalaris | Mar 28, 2021 01:02AM ET
The earnings per share (EPS) for all S&P 500 companies combined declined slightly to $175.23 this week.
The forward EPS is +10.2% so far this year. I expect a sizeable increase in the EPS as we roll into the new quarter, probably as early as next week.
Personal Consumption Expenditures (PCE) excluding food and energy (core PCE) was up 0.1% in February, but on an annualized basis core PCE declined from 1.48% to 1.41%. Core PCE is the Fed’s preferred reading on inflation. Part of their dual mandate before raising short terms rates is for Core PCE to average above 2% for some time. Clearly no threat of this yet.
Notable earnings
This week we got the latest reading of the M2 money supply. M2 is now up +27.1% higher than this time last year. This is a percentage gain not seen since the dataset began in 1960, and almost double the prior highs made in the 1970’s. When I talk about inflationary concerns, this is the source of the problem. The Fed still believes the inflationary effects will be temporary. I hope they are right. But comparisons between the fiscal/monetary response to the 2008 financial crisis and today fall short in light of this chart. The 2008 response didn’t increase the money supply anything close to what we are seeing today.
Stocks follow earnings and interest rates. Record high earnings/corporate profits combined with still negative real interest rates is a recipe for higher stock prices. It’s as simple as that (simple, but not easy!). And combine that with a Fed that is doubling down on not raising short term rates until at least 2024 (I have my doubts on this, but we’ll see), and unprecedented fiscal stimulus too.
I’m not surprised to see the tech heavy NASDAQ index lag behind the broader market. The NASDAQ is down about 7.5% from all time highs, while the S&P 500 made a new weekly closing high. Remember, a lot of those stocks produced 3-5 years worth of gains all in one year. Plus, if tax rates are going up, it makes sense for those affected to take gains now and pay a lower tax rate.
Speaking of higher taxes, I’m not too concerned with the current proposals. Since WWII there has been 13 years when taxes were raised, the S&P 500 finished positive in 12 of the 13 years, with an average gain of 9%. Yes, higher corporate taxes reduce profitability. So it is a negative in that regard. But I don’t see it as being enough to significantly change the fundamentals, at least not yet.
That being said, if you look at the S&P 500 chart at the top of the post, you can see we’ve climbed a long way in a short time. The market averages a 10% correction roughly every 12-18 months even during good times. You’ll never time them with any consistency, so it doesn’t make sense to try (unless you’re a trader of course). Make sure you are well diversified and take advantage of the opportunities as they present themselves. As Warren Buffett said, “We don’t have to be smarter than the rest. We have to be more disciplined then the rest.”
Next week we have 6 S&P 500 companies reporting earnings. For economic data, we have consumer confidence on Tuesday, ISM Manufacturing PMI on Thursday, and the all important jobs report on Friday.
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