S&P 500 Price vs Aggregate Earnings

In a continuation of the super-charged advance in the S&P500, an advance that began the day after election day in November 2016, the S&P added another 1.2% last week. Volume was very light; which again is not surprising as so many investors are simply not participating in this party. And volatility was pushed back down almost to he lows reached in July, as brave investors continue to short volatility with the belief that it simply cannot go up, at least not much or for very long.

In terms of technical analysis, the charts are now as stretched as they’ve ever been, and this includes the periods near the peak of the dot.com bubble in 2000. On both the daily and weekly charts, the S&P is not just hugging the upper Bollinger bands, but it’s above them. At the same time, most momentum indicators (eg. MACD, RSI, etc.) are also pressing up against their upper bounds. All technical indicators are screaming that if you buy US stocks now, you are most certainly not “buying the dip”.

At the same time, US macro news was mixed. On the positive side, ISM manufacturing and services both beat their respective consensus estimates. Also, construction spending came in slightly stronger than expected. On the other hand, consumer credit missed badly, and the big number of the week—payrolls—was a disaster, with the headline figure coming in at negative 33,000, instead of the positive 100,000 expected (and this expected number did already factor in the weather related impact). So once again, the US economy is firmly stuck in a low-rate-of-growth growth mode.

Finally, consider this interesting statistic about the S&P500:  The last time aggregate S&P GAAP earnings were at the levels they are at today (early 2015), the price of the S&P500 itself was almost 20% lower. That’s right—in two and a half years, S&P earnings have gone nowhere, but the S&P index has soared to new all-time record highs, and to prices way above those reached in early 2015.

Does this make sense?  Not to most sane market analysts, but apparently these folks have been overruled by all other market participants, who feel that it’s perfectly OK to pay almost 20% more for companies making the exact same amount in earnings as they did several years ago.

But are these optimistic market participants going to be right in the long term? 100 years of history strongly argues that they will lose their shirts—especially since many of them are now heavily buying stocks on margin—but there’s no reason that their temporary victory cannot go on for a while longer. Enjoy it while you can.


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