A Brief Look at Earnings Season and a Measure of SPX Over Valuation

A small excerpt from NFTRH 524:

Let’s take a brief look at earnings season. A complete view can be found at Factset.

While fiscally stimulated corporate performance has been going great guns, it appears that a softening is out ahead. I inserted an arrow at the relevant point. The market could simply be correcting its over valuation per EPS as it did in 2015-2016, assuming EPS also does not start to decline. But EPS estimates have started to come down per the second graph below. If that were to turn into a trend, the market would be in trouble.

Key items in my view are obviously the Tariffs issue, which is only just starting to impact a wide range of US corporations, and long-term interest rates, which make many businesses more expensive to operate and create competition for the S&P 500’s dividend yield (see third graph below).

EPS estimates have only just started to come down. The S&P 500 over reacted in real time but again, we should consider that Tariffs not to mention interest rates have probably not yet really begun to bite hard.

Here is the current S&P 500 dividend yield (courtesy of multpl.com). SPX is yielding a whopping 1.92% (sarcasm) vs. 10yr Treasury Notes at 3.2%! This is a measure of still-extreme over valuation for the US stock market. Not to insert undo hype, but although stocks often move up with yields, also consider that the stock market crash of 1987 was preceded by a sharp rise in Treasury bond yields.

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