As an unapologetic fundamental analyst, it has been difficult to watch markets continually shrug off poor or weak data, both from the broad economy as well as individual companies to trade dramatically higher on any hint that the Federal Reserve will continue to flood markets with unprecedented liquidity. While it is not at all uncommon for the market to ignore short-term fundamental noise, historically, these divergences haven't lasted.
The article asks...
"Earnings per share are falling, but the stock market continues to move up due to quantitative easing. The Fed’s policies continue to have little impact on the real economy but a large impact on financial asset prices. Given the continuing gap between the economy and markets, what is the rational investor to do?
A massive downward revision to bottom-up analysts’ expectations had no market impact at all,” JPMorgan concluded. (Hedge fund manager) Mr Einhorn notes that third-quarter S&P index earnings growth is expected to be half of what was forecast in June"
The author goes on to lament that net margin debt, funds that investors borrow to buy stocks, has surged to all-time highs. Further, lower quality stocks have outperformed the overall market. Both are traditional signs of excessive speculation.
The concern of course is that the market gets so stretched in terms of valuation, that the inevitable snap-back will be more and more painful. This is why our strategy has been to slowly reduce overall exposure through the course of the year for some clients and remain on the sidelines for others. I believe it is clear that stock investors will not be happy when the Fed finally decides to begin scaling back on their grand monetary experiment.
The following chart, courtesy of Bianco Research, illustrates the declining growth rate of corporate profits for the S&P 500 over the last ten quarters.
