Weighing The Week Ahead: Can Earnings Growth Justify Current Stock Prices?

Interesting SP 500 EPS statistic: 

    • 2021 est SP 500 EPS: $167.25 +23% expected y/y growth
    • 2020 est SP 500 EPS: $137 -17% y/y decline (estimated w Q4 ’20 earnings releases pending)
    • 2019 actual SP 500 EPS: $162.93 +1% y/y growth
    • 2018 actual SP 500 EPS: $161.93 +23% y/y growth
    • 2017 actual SP 500 EPS: $132.00 +12% y/y growth

If 2020 and 2021 expected SP 500 EPS doesn’t change much, the “average” growth for SP 500 earnings since Jan 1, 2017 is 8%.

The “average, annual return” for the SP 500 since Jan 1, 2017 is 16%.

Stimulus Payments

  • More than $112 billion has been sent electronically, so it is already in recipients’ bank accounts. This represents about 2/3 of the total for the program. (WSJ)
  • Faster than the first round because the government now has bank account information for several more groups of people, like Social Security recipients and beneficiaries of other programs.
  • Hitches are inevitable.
    • Payments to inactive accounts are returned with no immediate ability to resolve.
    • Money may go to former spouses.

Bad

Employment

  • Initial jobless claims remained at an elevated level of 787K, the same as the prior week but higher than the 752K expected. Continuing claims declined slightly, probably reflecting those who have reached the maximum period of benefits.

  • ADP private employment declined by 123K much worse than expectations of a 120K gain or November’s 304K gain.

The chart below reflects typical expectations for the ADP: Match the BLS result or it is an error. I strongly disagree. This is a different methodology and may well be better on some occasions. Analysis is stronger if the ADP report is viewed as another independent indicator (although they keep changing their methods to match the BLS).

  • Payroll employment for December declined 140K, much worse than expectations of a 112K gain or November’s upwardly revised (from 245K) 336K increase. I continue to regard this as a large overestimate of total jobs. The BLS method assumes that new businesses offset non-respondents. Here is the table for the final responses. We will know more about this problem when the Business Dynamics report comes out at the end of January.

  • Labor force participation declines account for the unchanged headline unemployment rate of 6.7%, in line with expectations. Dr. Robert Dieli’s excellent monthly report on employment effectively explains this key point.

  • Small businesses lag far behind employment at the start of the year or for similar periods in 2019.

Inflation Expectations

Was this merely a knee-jerk reaction to the new Democratic majority in the Senate? It is too soon to say, but important to monitor, as we do weekly in the Indicator Snapshot, even when it seems like little is happening. Here is a longer time period to provide additional perspective.

Coronavirus

Last week I wrote that I hoped for improvement in this news section during my time off. I am eager to drop this topic or to emphasize improvement. Sadly, things have gotten worse. I follow many data sources and include only a few each week to illustrate the universal story, and I also do statistical tracking of my own.

  • The worsening trend includes nearly every state.

  • Positive test results remain over twelve percent for the entire U.S. I have been tracking this since June, and it is at the highest level in my data series.
  • Cases per day have reached a new high. (91-DIVOC)

Economic Recovery

The stall in economic growth is beginning to show outside of employment.

  • Mortgage applications were lower over the last two-week period. (Calculated Risk). It has been a great year. Will it continue?

  • Rail traffic measured via Steven Hansen’s (GEI) economically intuitive sectors remains in a year-over-year decline and is getting worse. The red line in the chart below shows the rollover in the economic sectors.

Auto sales show a similar partial rebound pattern.

Ugly

Events at the U.S. Capitol. Wednesday’s rampage will earn an infamous place in history with hundreds of amateur real-time videos to provide evidence. The survey results show a wide disparity in opinions about responsibility.

And no, this is not an investment story. Many of my “ugly” items are not. For the investment world it was a non-story since stocks rose during and after the events. Here is my Twitter comment from Wednesday’s evening:

I frequently scoff at the post-hoc explanations of market moves. These facile statements always find something to highlight–soon accepted as “official.” Imagine pundits in a room without market foreknowledge. Show them tonight’s news. Would they predict higher stock futures?

Right on schedule, the experts provided explanations for the continued rally. Somehow, that seems to make it seem even worse.

Calendar

We have an active calendar for the coming week. Inflation data (both the CPI and PPI) are expected to show a significant uptick. The NFIB Small Business Optimism index will be especially interesting in the wake of the Georgia election results. Retail sales have supported the economic rebound, but a December decline is expected. We will also have the University of Michigan sentiment results from early January and December’s industrial production.

The first corporate earnings reports will get less attention than they deserve, and political events will get more.

Briefing.com has an excellent weekly calendar and many other useful features for subscribers.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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