Sunday, August 12, 2012

Are Earnings Irrelevant?

S&P 500 price went nowhere in the last 12 years. While there are multiple reasons for over a decade of flat U.S. stock market, none of them could be blamed on the innovative ways of domestic publicly-traded companies' ability to grow their earnings. Since August of 2000 EPS of S&P 500 has doubled. It is obvious that Dot-com bust, GFC, and Eurogeddon caused the equity price stagnation.

click on chart to enlarge
You can see from the above chart how the last two years SPX lagged the earnings growth. So why every time earnings season comes around so many pundits say "earnings are all that matters for stocks to advance"? They tell us to concentrate our attention on the preceding quarter, and better yet, look forward to the estimates of the current one and a whole year to be beat. Like clockwork we should expect the companies to squeeze the profits out of thin air, while we should forget about Eurozone's problems and pay attention to the magic of decoupling.

To confuse investors even further, a real problem with that thesis may be brewing on the horizon. No, let me rephrase that - it is already here. 2012 Q3 earnings will be down YoY, yes, down. This projection is based on the guidance the companies gave us on their Q2 conference calls.
What did the market do after companies told us that? Went up. You may ask: "why"? ECB and Fed are keeping the darn thing up with even more of promised liquidity. They are messing with the business cycle and alter it to their preference. Will it work again? I do not know. But what I do know is that what used to move stocks for generations is quickly becoming irrelevant.

So every time I hear Larry Kudlow say that "profits are the mother's milk of stocks" I cringe and realize that investors may again decide to leave the stock market in droves, dismayed by abundance of utter confusion and perpetual financial market manipulation by central banks.

click on chart to enlarge

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