The im­por­tance of big­ger earn­ings for stock funds

Kuwait Times - - BUSINESS -

This earn­ings sea­son is off to a good start, and the en­cour­ag­ing run is ex­pected to keep go­ing. In­stead of ex­cite­ment, though, the re­ac­tion so far from Wall Street has been more like quiet re­lief, and funds that track the broad stock mar­ket have only edged higher since earn­ings re­ports be­gan ar­riv­ing in earnest last week. That’s be­cause the strong re­ports that are forecast would be more a jus­ti­fi­ca­tion for the big moves that stock prices have al­ready made rather than rea­son for fur­ther gains.

Stock prices have risen more quickly than earn­ings in re­cent years, and the two tend to track with each other over the long term. Stocks even rose when prof­its were shrink­ing from mid-2015 into 2016, which has the mar­ket at more ex­pen­sive lev­els rel­a­tive to cor­po­rate prof­its.

Stock prices for com­pa­nies in the Stan­dard & Poor’s 500 in­dex are trad­ing at close to 21 times their earn­ings per share over the last 12 months, for ex­am­ple. That’s well above their av­er­age priceearn­ings ra­tio of 15.5 over the last 10 years, a pe­riod that in­cludes both the Great Re­ces­sion and the long run-up for stocks fol­low­ing it.

Of course, in­ter­est rates are still low, and in­vestors are will­ing to pay a higher price for each dol­lar of earn­ings in stocks when bonds are of­fer­ing small yields. But rates are ex­pected to con­tinue climb­ing mod­estly, as the Fed­eral Re­serve raises short-term in­ter­est rates and be­gins par­ing back its mas­sive trove of bond in­vest­ments. So, de­pend­ing on how high in­ter­est rates climb and other fac­tors, cor­po­rate earn­ings may need to keep ris­ing just to keep stock prices where they are to­day. This re­port­ing sea­son, an­a­lysts are ex­pect­ing S&P 500 com­pa­nies to re­port a roughly 6 per­cent rise in earn­ings per share from a year ear­lier. That would be less than half the growth rate of the first three months of the year, but the slow­down is un­der­stand­able given that the first quar­ter’s growth rate was the fastest since 2011. Among the trends to watch for as com­pa­nies re­port how they did from April through June:


Com­ing into this year, many ex­pected Pres­i­dent Donald Trump’s “Amer­ica First” poli­cies to mean com­pa­nies that do most of their busi­ness at home would be the big­gest win­ners.

But the com­pa­nies that get most of their sales from abroad may end up this earn­ing sea­son’s stars, now that Europe and de­vel­op­ing economies around the world are show­ing more life af­ter years of dis­ap­point­ment. Those eco­nomic up­turns, cou­pled with a weak­en­ing dol­lar, spell stronger re­sults for com­pa­nies that sell a lot to cus­tomers in Asia, Europe and else­where.


NEW YORK: Spe­cial­ist Mario Pi­cone works at his post on the floor of the New York Stock Ex­change.

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