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I am off to Maine today for a few days of fishing and economic debate and drinking. Before I go, I wanted to share a chart we pulled together in the office yesterday from the BBRG terminal. It was in response to the usual statement “This rally is driven by Fed printing and nothing else.”

Sorry, but I beg to differ. The chart shows that the rally has been driven — and in very large part — by a huge recovery in revenues and profits in corporate America following the financial crisis of 2007-09.

The white line shows the price of the S&P500 index from December 2007 to today. Red line is revenues, blue line is earnings. As you can see, earnings have led the rally off of the lows, multiple expansion took over in the middle, and most recently, earnings have accelerated. Higher revenues have paced higher stock prices as well.

I would be remiss if I did not acknowledge the role that lower borrowing costs lower companies’ expenses. That is a legitimate observation as to the impact of the Fed. For a variety of reasons, companies have chosen to engage in large buybacks as well, and that too plays a role.

However, the storytellers would have you ignore the enormous improvement in sales and profits in order to stick to the story that the market gains are ALL FED PRINTING ALL THE TIME.

Sorry, but that narrative fails.


Category: Earnings, Federal Reserve, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “Rising Revenue + Increased Profits = Bull Rally”

  1. rs55 says:

    Over the time period of this chart ( from late 2007 to today), using the chart data:

    - S&P is up around 36%
    - Revenues are up around 12%
    -EPS is up around 21%

    More interesting is since January 2013;
    - S&P is up around 41%
    -Revenues are up around 8%
    - EPS is up around 17%

    Obviously valuations have gone up substantially particularly since the beginning of 2013 and the QE3 episode. QE bond purchases of $1 Trillion, budget deficit around $700 bn in 2013 created $300 Bn of slop.
    ZIRP has clearly helped earnings. As have the historic levels of share buybacks.
    So the factors that enabled EPS to grow twice as fast as revenues appear to be heavily influenced by Fed policy.
    Valuations are clearly up primarily due to Fed policy as investors abandoned cash for ABC ( Anything But Cash).., and also due to aggressive forecasts for EPS. ( Actual Trailing GAAP EPS is $100, Forecast for 2015 is $130). Unfortunately analysts have historically be wildly off in their forward estimates – always on the high side and by 30% on average.
    I fail to see how this chart is an argument that things are where they are independent of the Fed.

  2. rs55 says:

    perhaps if the three parameters ( S&P price, Revenues and EPS) were scaled properly, the true picture would be more clear – which is that revenues grew modestly, EPS grew twice as fast as revenues and the S&P grew three times as fast as EPS (since 2013 ).

  3. mmartino21 says:

    I am surprised there is no mention of share buyback impact on Revenue/Share figures that justify revenue growth here. Are these not an important consideration?

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  5. Concerned Neighbour says:

    I don’t think anyone would dispute revenues and earnings have done well the last few years. The evidence is clear. Stocks are justifiably higher since 2009, and one could make a compelling argument they should never have fallen so far as at the trough. With monetary policy so favourable and every policy-maker worldwide catering to corporations every need, you’d have to be a moron not to be growing earnings in this environment. My criticism is that they’ve gone way too far with their policy, creating so-called “markets” that lack any sense of moral hazard or risk. No one is questioning the sustainability of the last few years. They’ve thoroughly destroyed the price discovery mechanism, sowing the seeds for future crises.

    There’s a reason the so-called “markets” always surge when the Fed announces policy. Two actually. First, to maintain the impression the Fed is in control. Second, because the Fed is an enabler. It’s the easiest trade of the last few years, and when “markets” get so predictable, you know they’re rigged.

    I’ve said it many times here and elsewhere: these “markets” present the worst opportunity set for value investing in at least a few decades. That doesn’t mean they won’t get worse; in fact, I very much expect they will.

  6. BigDaddy says:

    Interesting chart, but with a few caveats. First, EPS can be fiddled with, via share buybacks, accounting changes, write-down, write-ups etc. The revenue figures are harder to mess with and provide a better idea of the trend of business. But when you look at the revenue figures, they are growing at less than a 5% annual clip – much slower than the growth rate of the SP500 index. So we can say that the sales “multiple” has expanded during this time and would need historical reference to determine where the SP500 stands on a price/sales ratio.

    • supercorm says:

      Price/Sales ratio is elevated.
      But seems like no-one care as companies are still able to scare people and pay them peanuts in order to increase margins. Profits in % of GDP have never been that high since 1929 …

  7. 4whatitsworth says:

    Hmmm.. US GDP only growing at 2% but public company revenues growing at the same rate as the stock market?

  8. zero529 says:

    Hold the phone! Who’s going fishing? Is it Barry or Admin Tim?!? Baaaad things happen in the markets when Barry goes away on trips ;)


    ADMIN: Barry; I forgot to change the name to him — he sent that from the airport!

  9. spencer says:

    The S&P 500 divisor fell -0.39% in 2011, -1.31% in 2012 and -0.12% in 2013.

    This is how much shares outstanding declined.

    It is also how much buybacks,etc, added to reported EPS in those years.

    Not a very big impact.

  10. spencer says:

    The S&P 500 PE on trailing operating earnings is now about 17.

    That is about where it was in 2008 when the Fed started its aggressive easing.

    Since 1959 the S&P PE calculated this was has average 16.3.

    On this basis the fed actions have had little impact on the market PE, supposedly how Fed policy impacts the market.

    the PE did fall to a low of 13 in late 2011. That is about 30% below the current level.
    this implies the Fed had a significant impact on the market.

  11. MinskyMinded says:

    Fed printing and low interest policy has allowed government deficit spending to continue. Government deficit spending does show up in GDP and corporate profits as GMO’s James Montier has pointed out many times. While only one factor, that 8 trillion in new debt had to be spent somewhere, and much of it ended up as corporate revenue and increased profits.

    Cheers to those who understood government deficit spending has no limits and invested accordingly! I was naïve enough to think it would be stop by what turned out to be spineless Republicans.

  12. RW says:

    What BigDaddy, supercorm, and spencer said.

  13. neddyj says:

    Barry – longtime reader, and I know this has been your view for a long time. I don’t completely disagree with it, but I’ve mentioned a number of times that a chunk of that earnings growth came from bad loan writeoffs that banks took in 2008 that they were able to return to par value subsequently, giving the mirage of earnings growth. I’m not saying other companies didn’t legitimately growth earnings and revenues over that period – but the banks took a huge bite out of profits at the starting point (making the atarting point artificially low) and then provided a watershed of profits later (artificially high) – and it was only due to a rule change, not increased business.

    Your columns all defend this bull market…and so far, rightly so – nice job. I wouldn’t want to see you become a perma-bull though…

    Keep up the fine writing Barry.

  14. Livermore Shimervore says:

    So when do I get out of equities again? Or should I have been trailing out all along?
    Anyone know which site can display the % of S&P stocks trading above their all time, 2 year , 3 year, etc.?

  15. zinluver says:

    If it is, as it is, influenced heavily by the FED printing, the Chart is not reflecting this because the FED started tapering by $10 bilion a month in December 2013.and on the first 6 months since tapering started $70 billion are off the table already but I do not see the impact correlation on the graph having any effect. We probably will not see any until FED rates go back to normal and that is still 1 year away, at best. In the meantime is it better to hold cash with NIL return or find global value in shares while waiting for the markets to normalize which seem to be the case being built at this moment.