Do Corporate Earnings Matter Anymore? | The Big Conversation | Refinitiv

TL;DR

Earnings on the S&P 500 have stagnated for the past five years, yet the market continues to reach new all-time highs. The market's performance is driven by central bank liquidity, bond yields, and buybacks, while earnings and profits take a backseat.

Transcript

earnings on the S&P 500 have gone nowhere for the best part of five years and yet the S&P itself continues to make a series of new all-time highs begging the question do earnings even matter anymore bad is the big conversation is the S&P expensive to profits matter over a full cycle they do but it can be a very long waiting game for that full cycle... Read More

Key Insights

• 🤨 The disconnect between earnings and market performance raises the question of whether earnings even matter anymore.
• 🏦 Central banks, bond yields, and buybacks are the primary drivers of the market, overshadowing the importance of earnings and true growth.
• 😘 The market's preference for liquidity and low growth can persist as long as central banks remain in control.
• 🏦 While central bank liquidity remains the dominant force, eventually, earnings and true growth will matter.
• 🙂 Complacency in the market has been fueled by central bank interventions and slight improvements in data points that were once concerning.
• 💦 The US yield curve has started to steepen, and volatility levels have dropped, hinting at potential market complacency.
• 🤨 Speculative short positions in VIX futures have raised concerns, but the overall market backdrop is different compared to 2018.
• 🫰 Other asset classes, such as FX volatility and bond market volatility, also provide insights into the overall direction of the volatility index.

Questions & Answers

Q: Why has the S&P 500 been reaching new all-time highs while earnings remain stagnant?

The market is driven by central bank liquidity, bond yield trends, and buybacks, which have overshadowed the importance of earnings and profits.

Q: How does the current period compare to the dot-com boom and bust of 1998-2001?

There are similarities, as both periods saw the market reaching new all-time highs despite flatlining profits on the S&P 500.

Q: What is the forecast for earnings growth in 2019?

Earnings growth is expected to be the lowest since the profits recession of 2015-2016, with Q3 and Q4 projections showing very low levels of growth.

Q: Is the S&P 500 considered expensive in terms of its price-to-earnings ratio?

The current P/E ratio is higher than the historical average, but when adjusted for low bond yields, it appears more favorable.

Summary & Key Takeaways

• Despite flatlining profits on the S&P 500 over the last five years, the market has been making new all-time highs, similar to the dot-com boom and bust in 1998-2001.

• 2019 is projected to have the lowest earnings growth since the profits recession of 2015-2016, with Q3 and Q4 earning forecasts being particularly weak.

• The S&P's price-to-earnings (P/E) ratio is currently higher than the 20-year historical average, but relative to low bond yields, it appears relatively cheap.

• The primary drivers of the market are central bank liquidity, bond yields, and buybacks, while earnings and true growth take a backseat.