EDITORS John Gillin Greg Diamond Scott Garliss
And remember, a similar sell-off happened in February. There are always things to be concerned about, and many small caps have (rightly) sounded the alarm. But this is not a systemic problem. The overall economy is firing on all cylinders. Interest rates remain historically low, and all of this tells us that growth in the U.S. has a firm foundation. And as a recent article in the New York Times notes, the single-largest buyer for U.S. stocks is currently on the sidelines. Ahead of earnings season, companies must go into the “buyout blackout” period. They are prohibited from influencing their shares before and after earnings. According to Goldman Sachs, corporations are set to repurchase $770 billion worth of stocks this year, more than double last year’s total. In the meantime, earnings estimates for the S&P 500 Index continue to creep higher... A fewweeks ago, 2019 expectations were at $177.18 and now they’re at $179.50. As expectations rise, the market’s multiple drops, making it cheaper once more. The current multiple sits right around 15.4 times 2019 earnings versus the five-year average of 16.3 times, so the market’s not all that expensive. If earnings season plays out as expected, the market’s valuation will be even more attractive.
growth multiples to compress. This is considered especially negative for the tech sector. Bank earnings kicked off the third-quarter earnings season, and the results were underwhelming. Many investors worry the U.S. economy is at peak margins and costs are going up. The raw data show increases in raw material costs, transportation, and wages, and China tariffs are making life miserable for many U.S.-centric companies. Adding to this were accusations that China was planting bugs in computer servers and manipulating its currency to increase exports. Meanwhile in Europe, Italy remained a hot spot. The government is battling the EU over plans to run a larger budget deficit. Italy is broke and there are fears that other emerging market countries will turn their backs on the EU. Adding to this crisis mentality is the diplomatic battle with Saudi Arabia and the threat that it will weaponize oil prices. Overall, third-quarter forecasts have year- over-year earnings growth pegged at up 19.2%. The sell-off has the S&P trading around a reasonable multiple of 15.4 times 2019 expectations. In addition, GDP growth projections are still north of 4%, unemployment is 3.7%, wages are growing, and inflation remains subdued. PLENTY OF STRENGTH AHEAD
American Consequences 13
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