“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham
The stock market continued to move upward in the third quarter, spurred on by the first Fed Funds rate cut since 2020 and continued growing earnings. As noted investor Ben Graham postulated, investor sentiment can and does move markets in the short term but in the longer term, prices follow earnings.
Since the 1950s, S&P 500 earnings per share (EPS) have been growing mostly between 6% and 7%. At the macro level, earnings growth follows growth in the economy. In the second quarter, the U.S. economy grew 3.0% after inflation, and corporate cash flow and corporate dividends were at all-time highs.
Within the S&P 500, which weighs companies based on their market value, most of the earnings growth since the start of 2023 has come from a handful of companies, the so-called “Magnificent 7”. However, earnings growth has started to broaden out, and growth for the other 493 companies will roughly equal the earnings growth of the Mag 7 in the fourth quarter. The stock market has anticipated this with the Equal Weighted S&P 500 handily outperforming the market-cap weighted index in the third quarter. (For greater detail on the disparity between the earnings growth and stock performance of the Mag 7 versus the Equal Weight Index, please listen to our recent podcast by Tyler Alvord and Drew Lantinga).
The current consensus for EPS growth for the S&P 500 is 9.9% in 2024 and a further 15.0% in 2025 (compared to 2.3% in 2023). Third-quarter earnings reports, accompanied by updated projections from company managements, will be forthcoming in the next several weeks. As always, we will be closely analyzing these reports and participating in the management conference calls for the companies you own and for new investment opportunities.
There are many concerns for investors currently, including the ongoing wars in the Mideast and Ukraine, a closely contested election for both the Presidency and control of both houses of Congress, and out-of-control federal spending leading to record deficits and debt burden which has in turn led to higher inflation. Inflation is coming down, but prices are not. New cars and homes cost about 20% more than they did before the pandemic and remain out of reach for people on the middle and lower rungs of the economic ladder. The high cost of food isn’t helping, either. Any of these anxieties could lead to short-term volatility as investor sentiment impacts market prices. But longer-term, these concerns are only relevant for stock prices in terms of how they impact earnings.
At the micro level, a company’s earnings growth is determined by its ability to compete in a capitalist economy as its workers strive every day to impact its success. We search out such successful companies for your portfolio to enhance your investment success and help you obtain your specific goals and objectives.
Comments