NewsWire: Invest in growth, not slowdowns

From Scott Garliss at the Stansberry NewsWire:

Yesterday, Markit’s global flash Purchasing Managers’ Index data confirmed the recent trend in global growth… The U.S. remains robust while Japan and Europe continue to weaken. European central bankers have said they expect this moderation to be temporary but until we see otherwise, we can’t take their word for it. Japan has acknowledged growth is slowing and stated monetary easing policies are sticking around.

Then there are the Federal Open Market Committee meeting minutes…

There were two key takeaways coming out of the meeting. The first was, “Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.” In other words, we’ll likely see a rate hike in June… as expected.

The second takeaway was, “that it was premature to conclude that inflation would remain at levels around 2 percent, especially after several years in which inflation had persistently run below the Committee’s 2 percent objective.” That implies there will be another rate hike after June, most likely in December. The market has been debating that point, so this hurts the bears and short-sellers.

That shifts the conversation back to the S&P 500’s valuation. As we approach the midpoint of 2018, investors shift their valuation target to 2019’s multiple. The market is always trying to be six to eight months ahead. Analysts are estimating $174.58 in S&P earnings per share for 2019 and $192.03 for 2020. That places the price-to-earnings multiple at 15.7x for 2019 and 14.2x for 2020.

Then we look at earnings growth. According to FactSet, for the first quarter of 2018 (with 93% of S&P 500 companies having reported) the blended earnings growth rate was 24.5%. For the second quarter, analysts are expecting earnings growth of 18.8%, for the third quarter 20.9%, and for the fourth quarter 16.7%. For all of 2018, we’re potentially looking at 19.4% earnings growth.

So, why do I mention all of this? Because the data points to why you want to invest in U.S. stocks:

  1. On a relative economic growth basis, the U.S. is distancing itself from the rest of the world. You want to invest in growth stories, not relative slowdowns.
  2. The Fed told us inflation is on the rise but it’s nothing to be concerned about now. Again, this hurts the short-sell argument.
  3. The S&P’s valuation is looking increasingly positive as the focus shifts.
  4. Earnings growth is on the rise.

Market “health” is unpredictable, but right now the patient looks healthy. The data continue to support the idea that at 5%, market and institutional cash levels are still too high. And there’s good reason to expect the S&P to reach or beat the recent 2600-2800 range.


Scott Garliss

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