S&P 500 earnings per share (EPS) increased to $206.88 this past week. The forward EPS is now +30.1% year-to-date.
Q2 earnings are over. 88% of companies beat earnings expectations, and results came in a combined +15.8% above expectations. Total Q2 earnings growth was +95.6%. (I/B/E/S data from Refinitiv)
S&P 500 price to earnings (PE) ratio fell to 21.6.
S&P 500 earnings yield increased to 4.64%, which still compares favorably to the current 10-year treasury bond rate of 1.34%.
Economic data review
Producer Price Index (PPI) increased +0.7% for the month of August, and is now +8.3% over the last 12 months. This is the highest level of annualized producer price inflation since the dataset began November 2010. Still no signs of “transitory” inflation.
Chart of the week
The Job Openings & Labor Turnover Survey (JOLTS) was released this past week, showing an increase of +749K job openings in July (one month lag). There are now 10.39 million job openings across the US, which the above chart puts this into perspective, compared to the currently 8.38 million people aged 16 and older who are unemployed. This makes roughly 2.6 million job openings more than the entire unemployed population.
We are currently 5.3 million net job gains below the pre-COVID high point. So current openings are roughly double that amount. We should be encouraged by this, as it shows the potential for strong gains ahead.
Summary: A holiday shortened week with little earnings and economic data, investors used the opportunity to take some profits. Perhaps the biggest news of the week was the European Central Bank (ECB) announcement that they would begin reducing its asset purchase program. Along with several Fed voting members voicing support for the US central bank to also begin reducing asset purchases sooner rather than later.
I’ve said numerous times before, investors shouldn’t fear a modest pivot in policy. This is not “tightening” monetary policy, its best described as being “less accommodative.” The above chart puts this into perspective, with every major developed country's bond rates currently yielding below the rate of inflation (negative real yields). It’s better to see them take small incremental steps to reverse policy now, then risk falling behind and then having to tighten policy in a dramatic fashion.
While earnings and interest rates ultimately drive stock prices, sentiment and liquidity conditions can have temporary effects. The above chart is an update to the potential bearish divergence I’ve been monitoring for awhile. The top part of the chart shows the New York Stock Exchange advance/decline line. The bottom part of the chart shows the S&P 500 index.
While the S&P 500 has been making new highs up until last week, the advance/decline line topped out in June. Which means less stocks have been participating in these rallies, a potential sign of short term exhaustion. Much like the Fed removing emergency stimulus, a market correction to the vicinity of the 50 week moving average shouldn’t be feared. It would be perfectly normal and healthy, should it occur.
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