Running out of gimmicks to goose ‘earnings’ growth
So, did the nauseating last few months of 2018 signal the end of the secular bull market?
Or is the rebound that kicked-off 2019 a sign that the uptrend is still intact? Or it is just a dead-cat bounce?
Lance Roberts, chief investment strategist and chief editor of Real Investment Advice, returns to the podcast with fresh data that suggests the bear market that emerged late last year is still in play.
Of greater concern to him, though, is where things are headed from here:
When we get to the end of 2019 and we actually get estimates to where earnings should be by the end of 2019, the entire benefit of the tax cut will be erased because of the decline trend in earnings. So despite the fact that the tax cut in December of 2017 was touted as one of the greatest things for corporations ever — it was supposed to result in a massive boost to earnings — but ever since then, earnings have been on the decline. That’s why the market didn’t even respond last year to these tax cuts. Because, at the end of the day, we’re not creating more revenue at the top line. Instead, we’re eroding bottom line profitability.
And here’s another bit of data for you. Corporate profits, as reported by NIPA, by the government agency that tracks corporate profits, profits before tax have not grown in eight years. They’re at the same level currently (as of the end of last quarter) as they were eight years ago. Only corporate profits after tax have reached a new record. And that only occurred in the last quarter of last year.This tells a very important story: tthe revenue growth at the top line of corporations has only grown by about 45-50% since 2009 on a cumulative basis. That’s not annual; that’s the cumulative total. But yet, corporate profits at the bottom line (i.e. after tax), because of all the account gimmickry and jiggery that goes on, has exploded by over 350%.So let’s take a look at what happens at the top line. Profits before taxes has not grown in eight years. That’s in line with what you would expect from frevenue growth. Because of expenses, everything else in business is drawing basically at the rate of inflation, the rate of employment, et cetera, so we’re getting some deterioration there in terms of that. But if we have very weak revenue growth, it’s not surprising that bottom line corporate profitability hasn’t grown before we strip out the tax manipulation.Which is why stocks are expensive across the board. Basically, on every measure that you look at, with the exception of free cashflow, they’re expensive. They’re running about two times price to sales, some of the highest levels in history for S&P stocks. And with price to earnings valuations, even given the recent end of 2018 correction, we’re still trading on a ratio of 28x earnings. That’s going to get more expensive as we move into this year, because earnings are going to deteriorate further.When valuations truly contract, we’re going to be looking at somewhere between 10 to 12x earnings on stocks in the S&P. That’ll be your time to buy it. But that will require a 50-60% decline in the S&P from today’s levels.