LPL Financial: 4 Bullish Supports for Stocks
Although the Federal Reserve is obviously trying to bolster asset prices there are also several bullish fundamental supports underneath the most recent big run in stocks. At least that’s the story from LPL Financials Jeff Kleintop. He says there are big 4 supports that will keep the market from declining substantially (via LPL Financial):
- Earnings – Most importantly, while stocks have been range bound, earnings have not. At just over $100, earnings per share for S&P 500 companies are now double what they were at the peak of the market in 2000. It is interesting to note that at the bottom of the market decline in early 2009 earnings per share were still greater than they were at the peak of the market in 2000. While earnings could experience a drop if the U.S. were to return to recession, the current level of earnings may not decline anywhere near as much as they did in the past downturn. A 20% decline in earnings, often accompanying recessions, would result in earnings in the range of $80 and supportive of a market bottom at higher levels on the S&P 500 index than the lows of the past 15 years.
- Dividends – Supported by higher earnings, dividends per share for S&P 500 companies are much higher than at prior peaks in the index. For example, the annualized dividends per share for the S&P 500 currently total $31.09, more than 10% higher than at the last peak that occurred near the end of the third quarter of 2007, and nearly double the $16.32 of the first quarter of 2000.
- Valuations – The most commonly accepted measure of the value of stocks, the price-to-earnings ratio (the current price of the index divided by the earnings per share expected to be generated over the next year), are half of the lofty levels when the S&P 500 index first neared 1500 in the year 2000. When stocks most recently reached the low of the range in the first quarter of 2009 the price-to-earnings ratio was 12.3. Since then it has not risen much and currently stands at 12.9, below the two prior bottoms. For the S&P 500 to drop all the way back to the prior lows in price the valuation would need to decline to the single digits—levels not seen since the much worse economic backdrop of double-digit inflation and unemployment in the early 1980s.
- Economy – U.S. economic output, measured by GDP, has also grown dramatically. At $15.6 trillion, U.S. GDP is over 50% larger than in the first quarter of 2000 when it stood at $9.7 trillion.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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14 Comments
Kleintop is a permabull. Nothing new here.
SS, in German his name means “small top.”
somebody should tell these guys that it’s been a long time since stocks have been drive
n by fundamentals?
The Fed wants stocks higher. What else do we need to know?
For example this: Has the pool of greater fools exhausted itself?
Here’s a guy trying to justify a paycheck. He probably could have just said “Buy – The Fed is rigging asset prices” and saved some typing.
I can tell you this much, Kleintop will not be ahead of the curve when the global markets lose faith in the central planners. When it happens he will be 100% invested.
> When it happens he will be 100% invested.
With OMP (other people’s money)
Valuations are cheap? How can these “experts” not understand that normal valuation metrics do not make sense in an environment where rates are blatantly manipulated?
The Fed has always manipulated Treasury rates. That is what they do.
Valuations are cheap until the Fed drives the prospective 10 year annualized return on the SPX to roughly 0%, which is exactly what they’re going to do.
This means stocks will be expensive when the Shiller P/E goes back to 30+, like it did in the late 20s and early 00s.
Until then, yes stocks are cheap.
You can’t really say “stocks are cheap”.
Better to say that “although stocks are expensive based on reliable long-term valuation metrics, they are not absurdly expensive and thus there could be some more upside before it all comes crashing back to where it started”
he probably thought the market was “cheap” in 1999 as well. No mention of QE3
The response to QE3 has been buy the rumor, sell the news. Very weak follow through to QE3 and Draghi’s ECB bond buys so far. Technicals are looking a bit shaky here.
Corporations and citizens are being kept solvent by central banks, governments or better known as central planners.
We’ve experienced 30 years of compounding incompotence by 1)business leaders begging for favored treatment, 2) money managers/vulture funds/turn ‘specialist’ who while fighting to looked like they are returning the highest yield to investors by forcing companies into a downward spiraling cost structure (ie lay off employees) in order to transfer $ from workers to middlemen and investors, 3) banksters who gamble with the taxpayers money keeping the gains and handing the losses to taxpayers and finally the 4) governments who have over the course of the past 30 year and counting increasingly transfer power and favorable laws from protecting citizens to protecting the money interests.
Anyone who doesn’t recognize and agree with this assessment lives in cognitive dissonance.