Is it 1994 All Over Again ?

  • Fwd 4-qtr est: $164.11 vs last week’s $163.16
  • P.E ratio: 16.5x
  • PEG ratio: 0.76x
  • SP 500 earnings yield: 6.05% vs 5.98% last week
  • Year-over-year growth of fwd est: +21.75% vs last week’s 20.9%

(Source: Forward estimate from Thomson Reuters “This Week in Earnings”. The rest is internal.)

Commentary: Training for a 1/2 Ironman this summer took me on a 4-day bike camp late last week and through Sunday, May 20th, hence the SP 500 earnings data is a little late getting out.

As readers can see the forward estimates move forward with an almost giddy consistency, with the y/y growth of the forward estimate now at +21.75%.

It is remarkable how robust the SP 500 earnings data is and yet the SP 500 is up just slightly in 2018 – what gives ?

In 1994, the SP 500 earnings growth was 20% y/y and the SP 500 returned just 1% that year. Why ? The Fed – and really it was Alan Greenspan – raised rates 6 times in 1994.

This year is an almost picture-perfect copy of 1994 so far.

The only difference was that Fed Chair Greenspan shocked everyone with the first fed funds rate increase in 1994, after bringing fed funds down to 3% after the commercial real estate crisis of the early 1990’s (brought about I might add by the 1986 Reagan Tax Reform legislation) while this Fed has been gradually raising rates since December, 2015.

What’s the old maxim about history not repeating but often rhyming ?

My own opinion is that this stock market’s action is less about trade, tariff’s, Russia, the FBI, etc.etc. than the yield curve in 2018.

Supposedly the fed target is 3% Fed Funds in order to be “neutral” – this could go on a while (rising rates, etc.)

But SP 500 earnings growth – like a beach-ball being pushed under water – should keep the Sp 500 index and the general equity market from falling apart.

Just thinking out loud and trying to peer through the fog.

Thanks for reading.



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