Tuesday, August 6, 2013

PMIs, Revenues, & the Stock Market (excerpt)

Why does the stock market so often react to the latest readings of the domestic and global PMIs? The y/y growth rate of S&P 500 revenues is highly correlated with our Global Super PMI, which is simply an average of all of them. On balance, the latest readings are bullish, suggesting that the pace of global economic activity is picking up. That supports our forecast of relatively modest revenues growth of 5% for the S&P 500 next year.

Industry analysts are currently forecasting that S&P 500 revenues will rise 1.8% this year and 4.3% next year. Forward earnings for the S&P 500 rose to yet another record high last week of $118.84, the 14th consecutive weekly increase. Also rising to new record highs are the forward earnings of the S&P 400 and S&P 600. This might explain why stock prices have been rising to new record highs without much volatility in recent weeks as well.

Forward earnings for the S&P 500 rose faster than forward revenues during 2009 and 2010 as the profit margin rebounded. During 2011 and 2012, earnings grew at a more subdued pace in line with revenues. This year, forward earnings is once again outpacing the growth in forward revenues. It’s a bit hard to believe that profit margins can expand much more. However, given the latest batch of supercharged PMIs, it’s easier to believe that revenues growth might pick up.

Today's Morning Briefing: Second Wind. (1) No soft patch this summer. (2) Seasonal factors could be exaggerating strength. (3) Credibility of Endgame scenario has ended. (4) Resilience of economy is feeding on itself. (5) Central bankers’ forward guidance is working. (6) More green shoots. (7) A tour of world PMIs is upbeat for company revenues. (8) Another happy Earnings Tuesday. (9) There may be more upside for profit margins and revenue growth. (More for subscribers.)

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