After rising nearly five percent in the third quarter and over 16-percent year to date, the S&P 500 (^GSPC) is clearly not the bargain it once was. Not only because the price has gone up so quickly, but perhaps even more compelling, because profits have not.
"The simple fact of the matter is that the stock market has outperformed earnings growth in terms of a percentage basis of increase," says Michael Cuggino, president and portfolio manager at the Permanent Portfolio family of funds in the attached video.
Even though earnings estimates have been cut in half during the quarter, stocks have only come down a smidge from record levels set three weeks ago. Officially, FactSet data shows Q3 EPS growth expectations at 3.2% now, down from 6.5% on July 1st.
But for Cuggino, the list of concerns goes well beyond lowered expectations, and needs to include anemic GDP growth, high unemployment, light revenue growth, a drought of optimistic guidance (or a surge in negative forecasts), as well as the ongoing drama in Washington.
If markets got faked out by the Fed in September, it sounds as if they'll get washed out by earnings in October.
"We're looking for low-single-digit earnings growth, and a PE multiple of 15, 16, 17-times earnings," Cuggino says. "That's no longer as cheap as it used to be, so equity investors need to keep this in mind."
In light of this, he suggests using a balanced approached, where you don't get extremely aggressive or defensive. "The last couple of quarters have not been huge disappointments, but they haven't been big acceleration numbers either, and I think that mirrors the economic growth."
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