S&P 500 Forward Earnings (excerpt)

The forward earnings of all three S&P market cap indexes rose to new record highs again last week. On a year-over-year basis, forward earnings for the S&P 500, S&P 400, and S&P 600 are up 5.0%, 7.7%, and 9.3%, respectively. That’s provided the underlying support for 22.8%, 28.0%, and 30.4% y/y gains in their comparable stock price indexes. Obviously, rising valuations accounted for most of the stock price gains over the past year. But those gains wouldn’t have happened if earnings had been decreasing instead of increasing.

Joe and I have been forecasting that S&P 500 forward earnings will rise to $118 a share by the end of this year, which is also our forecast for 2014’s earnings. However, forward earnings is already up to $116.84 during the week of June 13.

One note of caution: We are a bit surprised by the strength in forward earnings given the recent weakness in S&P 500 forward revenues. We monitor lots of domestic and global economic indicators that are highly correlated with S&P 500 revenues. The y/y growth rates of almost all of them are in the low single digits and seem to be heading toward zero. For example, US manufacturing and trade sales rose just 1.5% y/y during April.

Today's Morning Briefing: Much Ado About Not Much? (1) Is the market getting the Fed’s message? (2) NZIRP is “forever” more than QE. (3) Goodbye Ben. Hello Janet? (4) Stop the taper tantrum! (5) No summer crisis in Europe this year? (6) Bearish non-events are bullish. (7) Another record high for forward earnings. (8) Bouncing off the 50-dma. (9) Averting the fiscal cliff was bullish. (10) Not much fiscal drag after all. (11) Less stress in European banking system. (12) BRICs have a ton of problems. (13) Let’s Stay Home. (14) Focus on overweight-rated housing-related industries. (More for subscribers.)

GDP & the FOMC (excerpt)

At the March meeting of the FOMC, the central tendency of the members’ forecasts for real GDP was 2.3%-2.8% for this year and 2.9%-3.4% next year. Yesterday, Jon Hilsenrath predicted in a WSJ article: “If they maintain confidence in their economic forecasts, it could signal they think they're on track to begin pulling back the [QE] program later this year.”

Real GDP rose 2.4% (saar) during Q1-2013. At the March meeting of the FOMC, there was concern expressed about the impact of sequestration as “participants thought that fiscal policy was exerting significant near-term restraint on the economy.” The data show some weakness for Q2-2013, but probably not as much as was feared.

Real GDP is up 1.8% y/y through the first quarter. Excluding federal, state, and local government spending, it is up 2.7% y/y, and has been hovering around 3.0% since mid-2010. Inflation-adjusted core retail sales rose 4.3% y/y during May to another new record high. On the other hand, manufacturing production did weaken noticeably during April and May. That might reflect the impact of cuts in federal government spending that started on March 1.

Today's Morning Briefing: Reality Check. (1) The man behind the curtain. (2) Hilsenrath beating Bernanke on Google Alerts. (3) Fed gets a D-minus for communication. (4) The focus will be on FOMC’s latest economic projections. (5) FOMC statements explicitly promised to maintain NZIRP, not QE. (6) GDP muddling along. (7) Labor market improving gradually. (8) FOMC may need to lower inflation forecast. (9) Focus on IT, rated market weight. (More for subscribers.)

The Bond Yield & GDP (excerpt)

In the past, before the era of financial repression imposed by central banks, the 10-year Treasury bond yield tended to trade around the y/y growth rate of nominal GDP. From the 1950s through the 1970s, the yield tended to trade below the GDP growth rate because bond investors failed to anticipate rising inflation.

They learned their lesson and bond yields generally exceeded GDP growth during the 1980s and early 1990s. That was the era of the "Bond Vigilantes," a term I coined in 1983. They contributed to breaking the back of inflation. As a result, by the late 1990s, they became less vigilant. While they’ve been repressed in the US by the Fed since late 2008, they were back in the saddle again during 2010 and 2011 in the peripheral countries of Europe. But then, ECB President Mario Draghi repressed them over there when he said on July 26, 2012 that he’ll do whatever it takes to defend the euro.

If the Fed stops repressing the Bond Vigilantes over here by phasing out QE, then the 10-year Treasury yield should rise to the growth rate of GDP, which was 3.4% y/y during Q1. That would probably be a big shock to the economy.

Today's Morning Briefing: Ben’s Choices. (1) Door #1, #2, or #3. (2) Press conference pressure. (3) Will Bernanke discipline the dissenters or cave? (4) Good excuse to taper QE: Federal deficit is shrinking. (5) Hail Mary pass. (6) Old normal bond yields would be a shock for sure. (7) Big outflow from bond funds last week. (8) EM stocks and bonds are submerging. (9) QE chatter is depressing inflationary expectations and boosting TIPS yield. (10) Retail sales a plus for Q2’s GDP, while discrediting recession forecast. (11) Lowering S&P 500 Retailing to market weight. (More for subscribers.)

S&P 500 Revenues & Earnings Review (excerpt)

On Tuesdays, Joe and I review the latest analysts’ consensus expectations for S&P 500 operating earnings. On Thursdays, we get the latest revenues data along with the sector details for earnings. So today is a good day to review all of the data through the week of June 6.

(1) S&P 500 revenues. Consensus expectations for revenues edged up slightly for 2013 and 2014. So did forward revenues, which remained 0.8% below the recent record high during the week of April 11. Yesterday, the World Bank released its latest Global Economic Prospects, predicting that the global economy will grow at a lackluster pace of about 2.2% this year and a little better at 3% in 2014 . That is slightly weaker growth than the bank forecast in January. Those are inflation-adjusted projections. Industry analysts are currently predicting that S&P 500 revenues in current dollars will rise 2.3% this year and 4.3% next year.

(2) S&P 500 earnings. The analysts are more optimistic on S&P 500 earnings, which they expect will rise 6.8% this year to $110.87 per share and 11.3% next year to $123.39. As we reported on Tuesday, forward earnings is at a record $116.41.

(3) S&P 500 margins. The analysts are contrarians about profit margins, which they think will rise from 9.5% in 2012 to 9.9% this year, and 10.5% next year. My guess is that most investors believe that profit margins have peaked.

Today's Morning Briefing: Sentimental Journey. (1) Bullish sentiment correcting more than the market. (2) Bull/bear ratios dive after Bernanke testifies. (3) Draghi’s do-nothing policy has worked, but may be starting to disappoint. (4) Is Draghi’s OMT unconstitutional? (5) BOJ playing poker with the Bond Vigilantes. (6) World Bank sees lackluster global growth ahead. (7) Industry analysts see slow-growing revenues ahead. (8) They are more upbeat on earnings though. (9) Focus on underweight-rated Consumer Staples. (More for subscribers.)

China (excerpt)

There were no upside surprises in China’s May economic indicators. Instead, they mostly confirm that the nation’s growth rate remains relatively high but may be losing some momentum. Real GDP growth slipped from 7.9% in Q4-2012 to 7.7% in the first quarter. April and May data suggest that growth isn’t picking up.

The month’s industrial output, retail sales, and fixed-asset investment met expectations, rising 9.2%, 12.9%, 20.4% y/y, respectively. Those numbers almost match April’s results. However, imports fell 0.8% y/y as the volume of many commodity shipments fell from a year ago. The volume of major metals imports, including copper and alumina, fell at double-digit rates. Coal imports fell sharply. The PPI inflation rate fell to minus 2.9% y/y in May, the lowest since September 2012.

Export growth slowed to only 0.6% y/y, the lowest since November 2009. Reuters reported on Sunday that the authorities cracked down on currency speculation disguised as export trades to skirt capital controls, which had created double-digit rises in export growth every month this year even as world growth stuttered. May exports to both the US and the EU--China's top two markets--fell from a year earlier for the third month in a row.

Today's Morning Briefing: Around the World. (1) Go Global or Stay Home? (2) The previous bull market was good for MEI sectors. (3) US equity mutual funds investing overseas are still getting inflows. (4) Staying away from some Stay Home sectors. (5) It all depends on global economic growth, which remains lackluster. (6) No juice in industrial commodities. (7) Euro Zone flat-lining at 2009’s depressed levels. (8) China’s trade data showing weaker domestic and global economies. (9) Two strikes against EMs. (10) Japan’s fireworks show. (More for subscribers.)