Wednesday Musings

Wednesday Musings

“Believe you can and you're halfway there.”

– Theodore Roosevelt

This past week Markets (S&P500) were flat, and are now up just over 17% for the year.

All major indices are right near their all time highs. Some feel this is cause for concern, but I feel differently. When a stock trades at a new high, it can taken as the most bullish signal. Why? There is by definition not a single investor that has lost money and needs to sell. What could be more bullish than this?

The most perplexing trend of this year's market is earnings, specifically earnings estimates. On 3/31 Estimates for second quarter growth were 53%, and were raised to 63% by 6/30. Wall Street Analysts are the most optimistic people on the planet, and almost always have to reduce their earnings estimates as the year goes on. This is one of the first times ever where estimates have increased as the year goes on, and never by these amounts.

In the chart below you can see the level of the Price to Earnings ratio for the S&P 500. The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

Although the market is up 17% year this stocks have actually gotten cheaper on a P/E basis. This is because earnings growth has surpassed share price movement. This factor, along with the bullish new highs, and likelihood that estimates for later this year are too low, should mean even higher stock prices in my opinion.