My pal Peter Boockvar has some comments out this morning about how much of the rally since 2013 has been due to earnings growth versus PE multiple expansion. He points out, correctly, that the earnings growth everyone is excited about has already been rewarded twice over thanks to rising multiples for the S&P 500 (emphasis mine)…
In 2013, earnings were up about 15% GAAP and 11% non GAAP but the S&P 500 rallied north of 30%. Thank you global QE Infinity. Assuming 10% earnings growth in 2017, earnings since Q4 2013 will TOTAL 16% GAAP and 19% non GAAP and since then while the S&P 500 is up about 35%. Taken together, the S&P 500 is up 74% since December 31st 2012 while GAAP earnings are up 35% and non GAAP earnings are up by 32%.
Thus, we’ve priced in the current earnings improvement twice over. This then begs the question of what happens to multiples when QT starts followed by ECB tapering. Predicting futures P/E ratios has as much to do with forecasting psychology as it does interest rates and inflation. So never easy. I’ll just predict that multiples are more likely going down than either staying unchanged or moving higher. Therefore, earnings better accelerate much further from here to offset that. That then will be determined by whether faster revenues can offset higher labor costs and lower profit margins.
I’ll repeat again, we are in the midst of a change in global monetary policy, no matter how gentle and gradual it is.
Josh here – BUT WHEN, PETER? lol
Managing Director, Chief Market Analyst
The Lindsey Group LLC