by Franklin J. Parker, CFA
The Summary
Investors have been buying over the last week — large-cap US stocks have hit all-time highs. That said, there are underlying weaknesses. It is not earnings that have pushed prices higher. With about three-quarters of the S&P 500 companies reporting earnings, we have only seen around 3% earnings growth over this time last year (and last year saw earnings contract by around 7%). This means that valuations on stocks are becoming stretched. In fact, the price-to-earnings ratio (a measure of stock valuation) is now above both its 5- and 10-year averages.
This week we see data on inflation, retail sales, industrial production, and consumer sentiment. All of this gives us a helpful read on the economy, retail sales and consumer sentiment are playing a bigger role than usual. Of course, at the moment, investors are watching the Fed very closely. Markets still expect a rate cut in the May/June timeframe, and Tuesday’s inflation may give investors reason to adjust their thinking (and thereby move markets).
I admit, markets hitting all-time highs somewhat baffles me. That said, until the underlying economic data improves, I am generally cautious. History has shown us that markets are fragile when they move higher without support from the economic data. In all (and as this week’s chart shows), I don’t think it is time to celebrate just yet.
Chart of the Week
An interesting chart from Fathom Consulting this week who point out that the new highs in stocks is, in fact, not a new high when we factor-in inflation. When accounting for inflation, earnings are also below where they were when markets hit their previous all-time high, and it has only gotten worse from there. In a sense, this helps us to normalize equity markets in an otherwise strange environment.
So, despite the headlines, stock investors have moved backward over the last 3ish years!
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