Stock markets discount the future. As a result, they often provide a contrarian viewpoint relative to consensus opinions, which tend to give more weight to current events and the latest data points. So, for example, recently released data for the euro area show that the region has been in a recession for the past two quarters. Yet the MSCI Europe stock price index bottomed this year on June 4 and is up 19.1% since then.
The S&P 500 is only 3.6% below its September 14 bull market high notwithstanding all the anxiety about the looming fiscal cliff. We now have Q3 data for the revenues and earnings of the S&P 500. The growth rates of both have dropped sharply, close to zero during the quarter. They certainly don’t explain why the market has been so resilient unless the outlook for both is that growth will soon turn up. That’s my forecast. Let's have a closer look at the latest data:
(1) Revenues. S&P 500 revenues per share rose 0.6% y/y during Q3, the weakest growth rate since Q3-2009, and well below the latest cyclical peak of 11.2% during Q2-2011. It is highly correlated with total US manufacturing and trade sales, which has been hovering around 3% y/y over the past five months, and remained near September’s record high during October.
(2) Earnings. S&P 500 operating earnings rose to a new record high of $25.98 per share during Q3, up 1.3% y/y. This is based on data compiled by Thomson Reuters I/B/E/S. The number in S&P's compilation edged down on a q/q basis to $24.39, falling 3.6% y/y.
In any case, we are expecting that better global economic growth next year will boost the growth rates of both revenues and earnings to 5%-7% in 2013. That won’t happen if the US falls off the fiscal cliff. However, if the cliff is averted, US economic growth is likely to be surprisingly strong given that lots of pent-up demand has been building, especially in housing-related industries.
Today's Morning Briefing: The End Is Not Near. (1) The world ended for the Mayans many moons ago. (2) Will Dec. 21 be a Day of Infamy? (3) A fourth year of living dangerously? (4) Stock markets aren’t buying the Mayan scenario. (5) Bulls are running in Shanghai and Tokyo. (6) New leaders in China and Japan. (7) No recession in MSCI Europe. No cliff in US stocks. (8) Revenues and earnings should start growing again in 2013. (9) Emerging economies leading the way in globalization. (10) Dr. Ed’s Movie Reviews 2012. (More for subscribers.)