by Franklin J. Parker, CFA
All eyes are on earnings this week. This week the focus is on financials, including Schwab, Citigroup, and Goldman Sachs. Overall, the financial sector is expected to not grow earnings this quarter at all — perhaps an indication that things are not so rosey.
I expect overall earnings to grow around 6% for this quarter which is reasonable but below the long-term average. As I have mentioned before several times, stock valuations are very stretched. For investors to simply break even at current levels, we would need to see 23% earnings growth every year for the next 10 years. Historically, such excessive expectations have ended with prices coming down precipitously.
This week is light on data (other than earnings), but we do get a sense of retail sales and industrial production. Last week, the big news was inflation which came in a few ticks higher than expected. Afterwhich investors questioned whether the Fed would cut rates at the pace they originally expected.
Despite JPMorgan’s call that the US economy has achieved a “soft landing,” I am not so optimistic. There are still several big problems lurking just under the surface that give me pause (commercial real estate being the biggest one). I continue to recommend caution, though I admit that such caution has not been rewarded this year.
Chart of the Week
This week’s chart from FactSet shows the large gap in earnings growth across the various sectors. Technology is the largest contributer to the overall market’s earnings growth, but if we removed Nvidia, Technology earnings growth is more in the 8% range. The point is, this is not a broad-based growth story — earnings are being driven by just a few companies in a few sectors. In a more typical growth cycle, we would expect see earnings growth more across the board.
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