Well, the S&P 500 finally broke its 6-week losing streak. In the week ending June 10, the S&P 500 closed at 1,270.98. Last Friday, June 17, the close was 1,270.50. That’s right: we got a half-point rally for the week.
The Greek bailout situation certainly weighs on investors’ minds. And it’s not just because of Greece alone. Debt is also an issue here in the U.S., and you could certainly make the case that some of the weakness in the employment numbers is a direct result of less government hiring.
How do we imagine government payrolls can grow, or even maintain current levels, when spending cuts are the biggest issue in Congress right now?
Basically, we can’t. That means any improvement in unemployment must come from the private sector. And frankly, it’s hard to be optimistic there, either.
Corporate America has adjusted for present demand. And there’s no evidence demand is increasing at a pace that would lead to hiring. The two sectors most affected by the financial crisis — housing and banking — are not hiring. The banks, especially, may even be laying off more workers as new financial regulations take hold.
When economic growth slows, investors sell stock in anticipation that revenues and profits will fall, and valuations will sink.
Right now, profit forecasts from analyst are very high. When 2Q earnings get underway, analysts expect to see 15% profit growth over last year’s 2Q.
For all of 2011, analysts expect S&P 500 companies to report $97.86 a share in profits. That would be $10 per share better than the next best year, which was 2006.
Then, in 2012, analysts expect another record year, of $111.82 per share in profits.
We must ask ourselves: is this possible, when the government is cutting spending, housing prices are falling and hiring is stagnant?
According to the Wall Street Journal, the S&P 500 currently trades with a forward P/E ratio (based on earnings estimates) of 12.75. That’s below historical norms of around 15.
Stocks are not expensive based on earnings. You could even call them cheap. But at this stage of the economic recovery, investors are wall aware of valuations. There should be no doubt that investors believe earnings estimates are too high.
Of course, we should not forget that there has been skepticism about earnings since the recovery began. Could earnings hold out in the coming 2Q earnings season? Sure they could. Profits could stay strong through the end of the year and into 2012.
But the economic data is going to have to turn more positive than it has been lately to convince anyone.
One thing is certain: companies have a record amount of cash on their balance sheets. And you can bet companies will be raising their dividend payments to shareholders.