Folks, the growth rate is slowing. 

And when the unrelenting fear over this mathematically obvious turn of events settles down, the masses will eventually recognize that this is not a bad thing.

Here’s the weekly S&P 500 earnings update:

  • Forward 4-quarter estimate: $168.79 vs last week's $169.13
  • P/E ratio: 16x
  • PEG ratio: 4x
  • S&P 500 earnings yield: +6.23% vs last week's +6.25%
  • Year-over-year growth of forward estimate: +3.8% vs last week's +4.2%

(Source: I/B/E/S by Refinitiv)

Though the forward S&P 500 EPS estimate continues to indicate slowing earnings growth for the S&P 500 (expected), the S&P 500 "earnings yield" continues to indicate the overall S&P 500 valuation relative to S&P 500 earnings growth remains reasonable.

Here is the S&P 500 "earnings yield" average over the periods of; one, three, six, twelve, twenty-four and thirty-six months:

  • 4 weeks: 6.32%
  • 12 weeks: 6.53%
  • 26 weeks: 6.27%
  • 52 weeks: 6.12%
  • 104 weeks: 5.84%
  • 156 weeks: 5.86%

 The above, measured against a back-drop of a "safe" 10-year bond at 2.67% for the entire 10 years shows just how costly fear can be over lengthy periods of time.

Do we really not think earnings will keep generally growing over the next 10, 20 and 30 years ahead? 

For perspective, 30 years ago S&P 500 earnings were $24.12 and dividends were:  $9.75.

In 2018 the pay-out was $53.61.

You can see that all here from Stern's tracker.

The Point?

The world is not ending.

Radiators and Drains

A long time ago, our great friend Alan Steel of Alan Steel Asset Management told me a story. 

We were in a nice little pub in Scotland after a long day of meetings and, while sipping his beer he said:

"Mike, after 47 years in this business, I have learned that you get two kinds of people in your life: Radiators and Drains. The radiators are those who tell you things that help you, that let you feel better, build your confidence and give an uplifting outlook. And they help you to focus on the positives even if there’s hard work involved. They leave you feeling generally better than when you first ran into them.”

He took another draw of his beer and continued: “The drains on the other hand, have a slightly different impact.  They seem to want to always focus on the negatives, the downside outlooks, the cloud on every horizon, the ghost around every corner.  They leaving you feeling a bit concerned, though at times you’re not exactly sure as to why. And they take away the smile on your face, leaving a frown and a tinge of angst at the drop of a hat."

He paused and looked away for a moment, then went on to say: “My life has been much better since I decided to just focus on the radiators.”

Somehow the beer tasted better that day. And our friendship and exchange of wisdom continues.

So, why not make a deal with yourself? While there will always be plenty to work through and fix (that doesn’t change), try and get better at knowing the difference between drains and radiators.

We can start by focusing on a few graphics (below – thanks to the great guys over at Bespoke!), which will help you see that things are doing just fine despite the market chop:

End Of World Chart1

End Of World Chart2

In the top chart, note that earnings beats are doing just fine.  Your Barbell Economy™ sectors continue to shine even if their recent price action is not keeping up with that at the moment. Ebbs and flows there are normal.

The middle chart tells us that the A/D line not only broke out to new highs last week, but that those were all-time new highs.  This provides you even more evidence that while panics will come and go, underlying value and strength continues to build over time. 

Last but not least - the current valuation is roughly where it was at many times in the past; namely back in 1991 for the purposes of this conversation.

Does anyone remember what happened after that…for almost a decade?!

Folks, trying to assume there is some "reason" for every little daily/hourly market response, action or event is merely a symptom of the media charade. 

Don't overlook what’s really happening.

Mike Williams
Founder and Managing Partner of Genesis Asset Management, New York