Bottom line, companies have delivered earnings like a .300+ hitter with 35+ hrs. But you're paying that hitter $35m+/yr (record salary). Good for now. But will this hitter earn its pay next year, and the year after?
1/8
As of August 23, 2021, 475 (95%) S&P 500 companies have reported Q2 2021 earnings with a beat rate of 87%, a new record. This compares to an average beat rate of 71% since the Great Recession ended.
2/8
Analysts expected YoY earnings of ~55%. The latest blended est. is ~ 95%. This jump of ~40% is record.
YoY earnings is compared to Q2 20220, the worst point of the lockdown, big base effect. This is why estimates for Q3 2021 earnings growth drop to 29% and 20% for Q4 2021.
3/8
Company guidance, an index of which is shown below, shows companies continue to see strong earnings growth.
It remains to be seen if more COVID restrictions or rising inflationary costs will dampen expectations for earnings in the future.
4/8
Hefty earnings growth is still needed. The 12-mo forward earnings P/E ratio, a Wall Street fav, is still quite high at 22.
Investors do not seemed bothered by these valuations. But should earnings disappoint, which has not been the case recently, investors may reconsider.
5/8
@5thrule argues that SPX valuation is made up of 3 parts:
* The current value of assets, or the book value
* The NPV of expected future earnings. Or, the median SPX earnings forecast by WS analysts for the next 3 years
* A residual component he calls “Hopes and Dreams”
6/8
Normally a market should factor in “Hopes and Dreams” as companies have flexible structures and can re-make themselves as needed. How much should this be?
The next chart shows “Hopes and Dreams” make up the largest part of valuation since the bubble peak of 2000.
7/8
Finally, market capitalization to GDP is also at a new record (the so-called Buffett Indicator).
So nothing about this market is cheap. But companies are delivering on earnings and they expect to continue to do so.
How long will they continues to is the question.
8/8
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Yesterday, Jim appeared on Bloomberg TV, warning that if the Fed cuts rates and the market thinks this is wrong, 10-year yields could surge through 5%.
(Perspective ... 10-year yields were last above 5% in October 2023 and as high as 4.85% in January).
🧵
2/8
President Trump disagrees with this thinking and believes the federal funds rate should be 1% right now.
From a "truth" posted on June 30.
3/8
If (or should I say when) Trump gets a Fed Chair to make 1% happen, how will the 10-year react?
Reminder of what happened last year to long rates when the Fed cuts rates (peach arrow) and the market does not think it's a good idea (cyan arrow).
I would argue that if the Fed cuts rates and you assume mortgage rates follow the federal funds rate lower (they may NOT be the case), home prices would rise, putting the monthly payment right back at $2,860.
Polymarket recession odds peaked at 65% on May 1st, the April ISM release date, suggesting Liberation Day and the 20% stock market correction did not damage the economy, as the "soft data" warned.
Subsequent April data confirmed this.
Will May see more of the same?
🧵
2/12
The prevailing narrative in the market for months has been that the labor market is going to fall apart, forcing the Fed to cut rates.
This has not happened, and so far, the "soft" (survey) data have been wildly off in predicting the economy.
3/12
ISM Employment upticked in May from April. The first monthly "May" data point suggests the labor market is still not weakening.
See the red line on the right. With increased tariffs (red line to the left), the prices of goods originating from China are increasing rapidly.
Also note that the Chinese-originated price rise (red line to the right) began around May 1st, the same time truflation started its upward march.
3/5
From the FT:
The Yale Budget Lab says the average US family would pay $2,800 more for the same basket of products purchased last year, should tariffs remain at their current level, with lower-income homes more exposed.
Chinese products being sold in the US have already seen marked increases in retail prices, according to analysis of high-frequency data from PriceStats by Alberto Cavallo of Harvard Business School.