That Awkward Moment When Stocks Rise While Profits FallMichael P. Regan
The stock market is grooving again, baby!
Pure rock-and-roll! It’s like Springsteen stormed the stage in February and got the crowd back on its feet after some moody emo mope had us all crying in our beer, or whatever emo mopes drink. (Chamomile tea or puppy dog tears or hemlock or whatever.)
To wit: Despite being a little meh today, the Standard & Poor’s 500 Index is up almost 6 percent in February. That’s an E-Street jam right there, friends, like the Main Point in 1975, and on pace to be the market’s best month since October 2011. It’s especially invigorating after the slide of more than 3 percent in January, which was like...ah, let’s not even go there.
And why not? Greece and the troika are BFFs again, the plunge in oil stopped before prices got to “free,” and corporate profits are... hold up, what are they doing? Actually the current estimates show they will drop 4.5 percent this quarter. And don’t forget, that’s compared with a 2014 period that included the famous polar vortex, which is not the name of an emo band but maybe should be. The second quarter’s not expected to be much better, with a 2.8 percent drop projected.
“The stock market’s march into record territory in the face of deteriorating profit trends makes many professional investors, including ourselves, instinctively uneasy,” Carmine J. Grigoli, chief investment strategist at Mizuho Securities USA Inc., wrote to clients today.
It seems the bonanza of consumer spending expected from the plunge in oil prices isn’t showing up in the earnings estimates for consumer companies, at least not yet. Consumer discretionary companies -- the stores, restaurant chains and others that depend on disposable income -- are forecast to post profit growth of 5.8 percent for this quarter and 8.9 percent in the second. Four months ago, the projections were for a 15 percent increase for each quarter.
For all of 2015, earnings growth is now projected to be about 2.4 percent for companies in the S&P 500, and coincidentally the index is up about that much so far this year. So for the stock market to gain much further from its current levels this year, one of two things must happen: 1. Companies must prove that the analysts are currently more pessimistic than a teenage Morrissey. 2. Price-to-earnings valuations that are already at multi-year highs must go even higher.
The risk that No. 2 doesn’t come to fruition as the Federal Reserve (eventually, maybe, probably, potentially, possibly?) raises interest rates this year helps explain some of the lowest year-end forecasts on Wall Street. With estimates for the S&P 500 to end the year at 2,100, the official party line from Goldman Sachs Group Inc. and Barclays Plc is that the benchmark index will close a little below its current level of 2,114 or so.
“There is no need to fear rate hikes,” Barclays Plc’s chief U.S. equity strategist, Jonathan Glionna, wrote in a note this week. “That is the conclusion we draw from the strong historical performance of equities at the start of rate hike cycles. Still, we do not project additional gains for the S&P 500. The reason is because earnings growth is unusually slow. In the past, earnings have been growing rapidly when the Fed has initiated a tightening cycle, providing an offset to contracting price-to-earnings multiples.”
As for Grigoli, he’s been able to ease those instinctively uneasy nerves with the notion that once the dollar and oil prices stabilize, “a much healthier profit picture will emerge” that should be sufficient to propel the S&P 500 to 2,250 by late summer and 2,300 by the end of the year. He especially likes the outlook for the consumer and construction industry, recommending the SPDR S&P Retail ETF and the iShares U.S. Home Construction ETF.
Chamomile tea has also been said to ease nerves. Beer too. And hemlock. Not sure about puppy dog tears.