Stock prices are going up as earnings growth expectations are going down.
“During the month of October, analysts lowered earnings estimates for companies in the S&P 500 for the fourth quarter,” said FactSet’s John Butters. “The Q4 bottom-up EPS estimate (which is an aggregation of the estimates for all 500 companies in the index) dropped 1.5% (to $US28.46 from $US28.90) during the month.”
“At the same time, the value of the S&P 500 increased 4.5% (to 1756.54 from 1681.55) during October, and it closed at a record high on October 29 (1771.95),” added Butters.
There’s arguably nothing more important to long-term stock market returns than earnings (or profit) growth.
“Profits are the mother’s milk of stocks,” says Larry Kudlow.
This phenomenon of prices rising faster than earnings is referred to as multiples expansion. In other words, valuations are rising as reflected by an increasing price-earnings ratio.
However, price-earnings ratios are drifting farther and farther away from their long-term averages, causing some market watchers to warn that we are in a bubble.
Surely, stock market bears warning of a sell-off can’t help but rip their hair out when they see charts like this.