The recently released BEA (Bureau of Economic Analysis) tally of corporate profits for the first quarter showed a meaningful decline. In addition, with most companies in the S&P 500 having now reported for the same period, the quarterly total looks lower than the fourth quarter. Trailing twelve month reported earnings are essentially unchanged. Yet the S&P 500 is trading near its all-time high water mark. A rational investor simply does not pay ever higher prices for a flattening stream of earnings with inflated valuations. And we know that Fed liquidity, even in its extreme, has historically been incapable of preventing major market declines.
Perhaps the decline in earnings momentum is beginning to weigh. The average stock in the Russell 2000 is down over 20% from its 52-week high even as the Fed and other central bankers continue QE efforts. But we have to remember that this market has been full of upside surprises.
In a world where growth is always over-promised by leaders who continue to stifle and corrupt free markets by printing fiat currencies while simultaneously cheering for stock markets, our dogged adherence to value investing and cycle dynamics seems more than reasonable.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.