Stocks are much cheaper after four years of gains than they were in the two previous bull markets after taking corporate earnings into account, according to Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC.
The CHART OF THE DAY tracks the ratio of the Standard & Poor’s 500 Index to profits at all U.S. companies, as compiled quarterly by the Commerce Department and expressed in billions of dollars. For the first quarter, the reading was 1.02.
Although the latest ratio was the highest since 2008, it was far from peaks of 1.43 in the third quarter of 2007 or 2.65 in the first quarter of 2000, as the chart shows. Both readings were posted near the end of multiyear gains in share prices.
“The stock market’s performance has been well supported,” Dutta said yesterday in an interview. “It’s perfectly sensible to pay up for profits.” The New York-based economist presented a similar chart in a May 31 note to clients.
S&P 500 company profits for the first quarter appear to have set a record, according to Howard Silverblatt, a senior index analyst at S&P in New York. Operating earnings equaled $25.76 on a per-share basis, based on results reported as of last week. The current record is $25.43 a share, set in last year’s second quarter.
Comparing the S&P 500 with the broader profit indicator shows the current bull market has more going for it than the Federal Reserve’s policy of buying bonds and holding interest rates near zero, Dutta said.
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