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Earnings Boom: Is It Sustainable?
21 Sep
Summary
- Earnings growth has supported the market despite falling PEs.
- Q3 earnings expectations are 24%, Q4 projected at 25-26%.
- Rising rates typically hinder market expansion and impact margins.
The stock market's strong performance this year is largely attributed to impressive earnings growth, which has supported valuations even as price-to-earnings ratios have declined. Analysts note that current earnings expectations for the third quarter are around 24%, with projections for the fourth quarter even higher at 25-26%.
However, questions are arising about the sustainability of such rapid earnings expansion. It is anticipated that these growth rates cannot continue indefinitely and will eventually need to slow down. A future slowdown could shift market reliance to multiple expansion for further gains.
This presents a challenge, as rising interest rates typically do not favor multiple expansion. Higher costs of capital tend to suppress price-to-earnings ratios. Recent data, including PPI numbers and import prices up 7% year-over-year, suggest that these higher costs are already impacting corporate margins.
In light of these factors, a tactical approach to investing is recommended. While longer-term investors maintain their outlook, short-term adjustments are prudent. Sectors such as energy, healthcare, and banking, despite recent fluctuations or oversold conditions, are showing strong underlying uptrends and present opportunities for investment.
