Tags: Kleintop | earnings | stocks | bonds

Schwab's Kleintop: Earnings Dropping, and Stocks May Be Next

By    |   Monday, 11 May 2015 07:00 AM

Corporate profits are sliding, with S&P 500 earnings expected to show a 0.4 percent dip for the first quarter, according to FactSet.

And that may be bad news for stocks, says Jeffrey Kleintop, chief investment strategist for Charles Schwab.

"With stocks on the rise in the world’s major markets in 2015, investors may be overlooking the fact that earnings, one of the most important drivers of long-term stock market performance, have been falling," he writes in Barron's.

"Fortunately, we believe this decline may be relatively short-lived. But if earnings keep dropping for a prolonged period, stocks may suffer significant declines, since their above-average valuations in many markets leave little room for disappointment."

In the United States, the S&P 500 index stands at 2,113, less than 1 percent below its record high. And the S&P 500's trailing price-earnings ratio registered 20.74 times last Friday, up from 17.60 a year earlier, according to Birinyi Associates.

Ambrose Evans-Pritchard, international business editor of The Daily Telegraph, also sees potential trouble for stocks, thanks to the recent bond market rout.

The market for German government bonds, or bunds, has hit the skids in recent days, dragging other countries' bond markets, including the United States, down with it.

"A wave of turmoil is sweeping through sovereign bond markets, setting off the most dramatic gyrations seen in recent years and threatening to spill over into over-heated equity markets," Evans-Pritchard writes.

The 10-year German government bond yield jumped to a five-month high of 0.786 percent Thursday, before calming down to 0.53 percent Friday. The 10-year U.S. Treasury yield stands at 2.11 percent, up from 1.85 percent just three weeks ago.

"Global bourses have so far shrugged off the bond market crash, but this may be untenable over time. There are already signs of jitters as the spring rally runs out of steam," Evans-Pritchard explains.

"Equity prices and bond yields tend to feed off each other, though the relationship is not always mechanical and there can be lags."

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Corporate profits are sliding, with S&P 500 earnings expected to show a 0.4 percent dip for the first quarter, according to FactSet. And that may be bad news for stocks, says Jeffrey Kleintop, chief investment strategist for Charles Schwab.
Kleintop, earnings, stocks, bonds
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2015-00-11
Monday, 11 May 2015 07:00 AM
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