This year’s gains are nearly all from sentiment … can we trust earnings estimates? … where will earnings growth come from? … how Louis Navellier is sidestepping the problem We can thank one specific tailwind for the bull market of 2023…
Sentiment.
Optimism on Wall Street is great, but the flip side is that the gains have not originated from a more robust source of bullishness – earnings.
Sentiment can be very powerful and can drive a bull market for a long time. But sentiment borrows heavily from “hope” of things to come. So, at some point, either those hopeful expectations must manifest as truth via earnings…or a different truth will demand a change in sentiment.
The question today is: “What will change first? Sentiment or earnings?” To unpack this, let’s begin by reconfiguring the price-to-earnings ratio The price-to-earnings (PE) ratio is perhaps the most widely referenced valuation metric.
By comparing a company’s stock price per share to its earnings per share, that gives us a PE multiple, which provides investors a feel for a stock’s valuation. 
Now, if we transpose this equation to isolate “Stock Price” on the left side rather than “PE Ratio,” we’d see things a bit differently.
That rearrangement helps us see that what drives a stock price is the interplay between a company’s earnings and this “PE Ratio” itself.
In that situation, what exactly is the “PE Ratio”?
Well, it’s a proxy for investor sentiment. It’s the emotion-based multiple that investors are willing to pay in exchange for some amount of earnings.
Let’s say Apple is about to roll out a new tech gizmo that investors hope will generate billions of dollars in new profits. Of course, this is just hope – investors have no idea whether the new gizmo will be a hit… plus, the rollout could go poorly from an operational perspective… or Apple’s competitors could introduce their own product and eat up market share…
But if Apple investors believe billions in new earnings are on the way, they’ll be excited and therefore willing to pay a much higher stock price today in hopes that Apple’s earnings tomorrow will warrant an even higher stock price.
So, we would see Apple’s share price begin to soar – not because of real, organic earnings but because of hope… the PE multiple… investor sentiment.
But what happens if the product rollout doesn’t go well?
What if the earnings it generates fail to justify Apple’s stock price that has climbed to nosebleed levels due to this swelling investor sentiment? ADVERTISEMENT Caught on Camera — “King of Quants” Income Project Revealed Never before seen footage reveals Louis Navellier’s secretive income project. After 3 years of research into A.I. and machine learning Louis reveal ultimate income strategy designed to make average Americans $60,000 a year (even if you have a small portfolio).
You won’t believe this— Go here now to see this brand new presentation. We ask this question because this year’s blazing stock market has come almost entirely from swelling investor sentiment, not earnings Here’s Axios from July, a week after Q2 earnings season began: …Investors haven't seemed to care much about corporate fundamentals lately.
The S&P 500 is up big this year. But importantly, it's not really because people think corporations will bag far fatter profits in the immediate future.
In fact, Wall Street analysts think companies in the S&P 500 will see earnings per share rise just 1% in 2023, compared with 2022. The S&P 500, on the other hand, is up 17%.
In other words, share prices are outpacing puny expectations for profit growth. A helpful visual of this dynamic comes from Northern Trust Asset Management. Below, you can see the respective contributions to the S&P’s gain this year broken down by earnings growth and multiple growth.
This year’s gains in the S&P are circled in red. The dark color on the bottom represents the tiny fraction of gains attributable to earnings growth. The huge blue spike is the contribution from sentiment growth.
We’ll give you the wide-angle view first dating back to 1994, then narrow in so you can see it more easily. 
Here’s the close-up angle.
Again, the tiny sliver of the darker color at the bottom shows gains from earnings. The massive, lighter-colored block on top shows gains stemming from increasingly bullish sentiment. 
A bull market driven exclusively by investor sentiment isn’t sustainable in the long-term. Lofty stock prices need a firm foundation of healthy, growing earnings. It’s the old analogy of building a home on rock instead of sand.
If lofty prices are not supported by higher earnings, investor sentiment eventually changes – in other words, a falling PE multiple. And when you multiply a lower PE multiple by smaller earnings per share, the result is a much lower stock price.
So, what we want to see now are real, organic earnings gains – no more sentiment gains.
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Go here now to see this shocking story. What estimates suggest about coming earnings FactSet is the go-to earnings data analytics group used by the pros. Its latest survey of analysts shows that for calendar year 2024, the projected earnings growth rate is 12.2%.
Here’s JPMorgan chief global market strategist Marko Kolanovic with his take on that forecast: Earnings estimates appear too optimistic…
The consensus 2024 EPS growth rate of 12% appears too optimistic given an aging business cycle with very restrictive monetary policy, still rising cost of capital, lapping of very easy fiscal policy, eroding consumer savings and household liquidity, low unemployment rate, and increasing risk of a recession for some of the largest economies abroad (e.g., China, Germany)… Yes, inflation is falling. That’s going to provide some breathing room for U.S. consumers who have been feeling the pain.
But to what extent will that single tailwind offset the headwinds Kolanovic identifies?
The Fed appears nowhere close to cutting rates, which is squeezing corporate growth… consumers are down to their last bit of pandemic savings and spending on credit cards just to pay day-to-day living expenses is setting new highs… the unemployment rate is so low that the only reasonable direction for it to go is up … and some of the biggest countries in the world are falling into a recession, which will eventually impact many U.S. companies that rely heavily on overseas revenues.
Plus, Kolanovic didn’t mention the strengthening dollar which is also a headwind for earnings. These are a lot of obstacles for earnings to overcome, and yet the consensus estimate is for double-digit earnings growth next year But from where, exactly? Not every company is like Nvidia, enjoying huge AI-related tailwinds to earnings.
Where will the average stock’s earnings growth come from?
It’ll be tough for it to come from margin expansion.
Here’s the Associated Press: The squeeze is on for profits at big companies.
After enjoying a strong run where they could keep raising prices to boost their profits, companies are now stuck in a vise.
On one end, revenue is under pressure as the global economy remains fragile. On the other, companies are having to pay higher wages for workers, among other costs.
Caught in the middle are corporate profit margins, which measure how much in profit companies make on each $1 of revenue. Below, we look at corporate profit margins going back to 1947. We’re coming off the highest margins ever, still not even back into broad, average territory.
In today’s (and tomorrow’s) economic climate, is it more likely that margins will reverse and push back toward all-time highs or remain as they are…or even compress further? 
So, if not profit margins, will this 12% earnings growth come from consumer spending? Perhaps.
The U.S. consumer has continued spending all year, surprising many analysts including myself (though, to be fair, this continuation of spending is increasingly coming from toxic debt spending).
But consider this – all that resilient spending has analysts projecting that 2023’s calendar year earnings growth rate will come in at just 0.8%.
And as we noted earlier, the projections for 2024’s calendar year earnings growth rate is a whopping 12.2%.
We just pointed toward the pressure on corporate profit margins. Without help there, we need consumers to open their wallets considerably wider if we’re going to jump from 0.8% earnings growth this year to 12.2% earnings growth next year.
Is that reasonable?
Not if we’re finally seeing these consumers begin to have trouble with employment.
Yesterday, the July JOLTS data showed that job openings fell to a seasonally adjusted 8.827 million. That’s down from 9.165 million in June.
Meanwhile, this morning’s report from ADP showed new jobs totaled just 177,000 this month. That’s below the expectation of 200,000 jobs and miles lower than the revised total of 371,000 added in July.
As my colleague Luis Hernandez has astutely pointed out all year, we can point toward all sorts of red flags for the economy, but at the end of the day, if the labor market remains strong, it’s hard to have a recession. Are we finally seeing the labor market begin to soften?
Then, just yesterday, Bloomberg reported that U.S. consumer confidence fell hard in August.
From Bloomberg: US consumer confidence fell by the most in two years as souring views on the labor market, higher borrowing costs and lingering inflation curbed optimism.
The Conference Board’s index fell to 106.1 this month from 114 in July, data out Tuesday showed. The number was below all estimates in a Bloomberg survey, and the decline reversed most of the advance over the previous two months. Consider the yin and the yang of this data On one hand, this is exactly what Wall Street wants to see. That’s because it’s what the Fed wants to see – cooling growth.
Yes, we could still be in for rates that are “higher for longer” but if this cooler data leads the Fed to speak more openly about “no more hikes” later this fall, it would be an enormous tailwind to investor sentiment. Combine that with what, historically, is the strongest time of the year for stocks (November and December) and it could prolong this sentiment-driven bull market.
But on the other hand, think about what these data (especially Bloomberg’s report on waning consumer confidence) suggest for sentiment right now…
It’s not a big leap going from “U.S. consumer confidence” to “U.S. investor confidence.”
How long before flagging consumer confidence filters into the stock market?
And given that nearly all of 2023’s market gains have come from investor confidence, what does that suggest about the sturdiness of today’s bull market?
Bottom line: We need real earnings growth to give this market some legs. ADVERTISEMENT Death Of Coke? For the last 100+ years-- Coke has been an icon for income investors—but recently world’s great growth investors revealed shocking breakthrough about the income market that spells disaster for old school dividend stocks like Coke… Click here now for this urgent story. As always, my skepticism doesn’t mean “get out of the market” Here in the Digest, our position hasn’t changed for months – despite my longer-term concerns, this is a market that’s been climbing all year. So, trade it higher while bullish conditions persist.
(Though mind your stop-losses and maintain discipline if conditions deteriorate.)
Beyond that, a wise move is to limit your investments to companies that are already demonstrating the ability to grow their earnings.
That’s what legendary investor Louis Navellier has done for decades. In fact, that’s the cornerstone of his entire market approach – find companies exhibiting fundamental strength.
To see what a difference this can make in your portfolio, let’s turn to Louis’ Accelerated Profits investment service.
In yesterday’s issue, after highlighting how September is a bad month for stocks returns according to history, Louis writes: The good news is that our Accelerated Profits Buy List stocks should continue to exhibit relative strength in September just like they did in August.
The last two months – July and August – represent my strongest relative performance compared to the S&P 500 since last October and November.
The reality is that we have a diverse portfolio that’s benefiting from several trends, including artificial intelligence (AI), energy, shipping, pharmaceuticals and consumer spending…
So, while September may be another bumpy month for the stock market, if you have a diversified personal portfolio of our fundamentally superior stocks, you can invest confidently and not worry about all the distractions and seasonal shenanigans. Zooming out, this year’s gains have come from sentiment not earnings. Unless that changes, the market will eventually face a wakeup call.
So, why not follow Louis’ lead and sidestep that problem by filling your portfolio only with companies that are already generating healthy earnings growth numbers?
If you don’t do this, at least recognize what it means…
You’re banking on sentiment to continue propping up your portfolio…and there’s always a limit to how long that will work.
Have a good evening,
Jeff Remsburg |
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