If I hear one more TV segment on this topic I will rip my hair out. It is a non-debate.

Dan Greenhaus has a good piece of research out on the topic that both Art Cashin and Joe Weisenthal have cited. Greenhaus, the chief strategist at BTIG, demonstrates how S&P earnings since the market lows of March 2009 have gone up by 129% ($43 in EPS then vs today’s $98 or so). This 129% improvement in the index’s earnings perfectly matches the S&P’s price gain of 128%. He’s saying that the gains in stocks are not being solely driven by the Fed but by profit growth and earnings per share.

He’s right, so is Art, so is Joe.  But the people who claim this is a Fed driven market are also right.

Because the Fed is not driving the stock market – it is driving the fundamentals that are driving the stock market. Once you make this distinction, it frees you up from a lot of the nonsense and conspiratorial scuttlebutt that passes for market commentary these days. The Fed’s ZIRP policy is the most important driver of US earnings growth right now in my estimation which is what’s behind the rally in share prices.

Take the bank stock sector, as represented by the XLF – the stocks underlying this index ETF demonstrate some of the most obvious effects of how the Fed is moving earnings. Keep in mind that the XLF includes 81 of the largest banks, credit card companies and insurers. The average market cap is like $80 billion – so this earnings and share price comeback is highly important to the broader market’s advance. You should be aware that the financial sector represents 15.9% of the S&P right now, ranking just behind tech as the largest weight. In addition, banks make up a whopping 23% of the MidCap 400 and another 21% of the SmallCap 600.

And so when bank earnings are rising, the market’s earnings are rising. This is usually accompanied by stock prices rising and multiples expanding unless we’re at the tail-end of a cycle and too much improvement is already being priced in.

In 2008, the XLF components lost a combined negative .32 cents per share.  In 2009, they turned it around (but just barely) earning a total of .39 cents per share. In 2010 the XLF earns $1.09 per share, followed by $1.14 in 2011 and $1.21 last year. In 2012, the S&P’s operating earnings per share grew by 4.5% but for the financial sector, operating EPS were up almost triple that at +14%. Better capital markets and housing markets and some pockets of increasing economic activity enabled this – but Federal Reserve liquidity has its fingerprints all over the place.

Thanks to multiple expansion for the biggest components of the XLF and rapidly increasing dividends and buybacks, you can clearly understand why banks were able to make such a huge contribution to the market’s continuing comeback. You can also see, if you understand how banks borrow and lend, that this is almost entirely thanks to the Fed’s assistance.

So the Fed is not running around buying stocks – but the Fed is influencing the fundamentals of stocks – and, as a result, institutions are buying. On top of this effect, the Fed is also simultaneously making the alternatives to stocks less palatable with interest rate intervention and its own yield-dampening bond purchase programs.

Whether or not the Fed is driving the market is not a real argument – WE KNOW EMPHATICALLY THAT IT IS. The only question that matters is for how much longer will this continue and what happens when it does not?


A Mindblowing Stat Shows What’s Really Been Driving Stocks The Last 4 Years (Business Insider)

ART CASHIN: There’s A Simple ‘Occam’s Razor’ Explanation For Why Stocks Have Had Such An Amazing Run (Business Insider)


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Promotional Pens commented on Sep 19

    … [Trackback]

    […] Read More on that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  2. pinewswire commented on Sep 23

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  3. Sell Cvv - Dumps With pin commented on Sep 27

    … [Trackback]

    […] Info to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  4. bitcoin loophole review 2020 commented on Sep 28

    … [Trackback]

    […] Read More Info here to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  5. click for more commented on Nov 25

    … [Trackback]

    […] There you will find 58647 more Information to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  6. td canada trust commented on Dec 16

    … [Trackback]

    […] Find More Information here to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  7. Research commented on Dec 28

    … [Trackback]

    […] Read More to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]

  8. fake patek philippe commented on Jan 28

    … [Trackback]

    […] There you can find 5061 more Information to that Topic: thereformedbroker.com/2013/03/02/is-the-fed-driving-the-stock-market-or-is-it-the-fundamentals/ […]