Not to throw cold water on the story, but there’s a contrarian story to tell when earnings growth joins the > 20% club. In keeping with the “better or worse tends to matter more than good or bad” message I give to investors consistently, the stock market has a keen ability to sniff out inflection points in advance. Yes, 20%-plus earnings growth is good news in an absolute sense, but it also likely represents a rate fairly close to the ultimate peak growth rate — beyond which the growth rate will inevitably slow.
Investors should not be extrapolating the boost to earnings from tax (and regulatory) reform too far into the future; while questioning whether the boost is already reflected in stock prices.
As you can see in the table below, stocks have actually had fairly weak (albeit positive) returns historically when S&P earnings growth has exceeded 20%. Notice as well that the best zone for earnings growth has actually been when earnings are declining by double-digits (reflecting the market’s tendency to discount what’s going to happen, not just react to what’s already happened).
The table to which she refers shows that subsequent annualised stock market gains were only 2.6 per cent after quarters in which earnings growth exceeded 20 per cent; the average gain was 25 per cent following a decline in earnings of between 10 and 25 per cent, ramming home that investors might indeed be quite sensible to ask themselves at this point if the end of the cycle is at hand.
Коментар