Tags: Bilello | stocks | earnings | Fed

Pension Partners' Bilello: Why Do Stocks Keep Rising Despite Weak Earnings? The Fed

By    |   Tuesday, 19 May 2015 07:00 AM

Corporate profits are falling, yet the stock market keeps rising, with the S&P 500 index standing less than 1 percent from a record high. So what gives?

Turn to two legends of stock analysis, Benjamin Graham and David Dodd, for the answer, says Charlie Bilello, director of research at Pension Partners.

"The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers," Graham and Dodd wrote in the book "Security Analysis."

With 92 percent of S&P 500 companies having released first-quarter earnings, profits per share are down 13 percent for the quarter, according to Bilello.

So why are stocks up?

"Buyers and sellers have become fixated on one fact and one fact alone: easy monetary policy," he writes in his blog. "While earnings and economic data have been weak in 2015, the Federal Reserve has responded by becoming increasingly dovish."

The conundrum won't disappear until "investors choose to respond to other data beyond monetary policy or when the Fed chooses to finally raise interest rates," Bilello predicts.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. Economists don't expect it to increase rates until at least September.

"It is not earnings that drive stocks prices but the multiple investors are willing to pay for those earnings. While earnings have declined, investors have been happy to pay a higher and higher multiple as long as interest rates remain at 0 percent."

Meanwhile, with the Vanguard Total Bond Market Index Fund now the world's biggest mutual fund in the fixed-income space, its manager Greg Davis reigns as the new king of the bond market.

So what does his royal highness think of the economy and Fed policy? Economic growth is "relatively muted," he tells CNBC. GDP expanded just 0.2 percent in the first quarter, and the Atlanta Fed's forecasting model puts second-quarter growth at only 0.7 percent.

"One in nine Americans are still underemployed. You don't see a ton of strength in the labor market," Davis notes. The unemployment rate was 5.4 percent in April. Meanwhile, inflation remains low, he notes. Consumer prices slid 0.1 percent in the 12 months through March.

Davis sees growth of about 2.5 percent for the year as a whole. And what does that mean for the Fed?

"Our best estimate is for them to start the rate hike cycle sometime in September or December," he predicts, matching the forecast of many other experts.

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Corporate profits are falling, yet the stock market keeps rising, with the S&P 500 index standing less than 1 percent from a record high. So what gives?
Bilello, stocks, earnings, Fed
Tuesday, 19 May 2015 07:00 AM
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