Corporate Profits
There has been a little slippage in the profits indicators, but nothing serious to date. Earnings
have recovered dramatically from extremely depressed levels. Yet, when viewed in historic
context, S&P 500 net per share is still running well below levels consistent with a cyclical
top and thus have plenty of room to run. Analyst earnings projections are moving well ahead
of what the macro indicators suggest, but the decay in the market's p/e ratio over the past
14 months suggests that investors have more modest expectations. Given the substantial slack
still extant in the US economy and a rather moderate growth outlook, profits have the potential
to rise out through 2014, provided the economy gains greater balance.
Oil Price
Rapid surges in the oil price do constrain the stock market, but it takes an up move in oil which
runs well above its long term channel to attract more serious concern from stock investors, such
as occured from mid 2007 - mid 2008, and more recently, from Feb. into early May. The sharp
break down in the oil price in recent weeks does take considerable pressure off stocks, but as
of now the stock market still remains vulnerable to a rising oil price.
Liquidity
Money market fund cash reserves have been drawn down very sharply over the past two years
to fund advances in the capital markets. It has only been very recently that institutional players
have begun to add a little more cushion to reserves. Now as a recovering economy rolls along
and reserves are drained to capture gains in the markets, private sector credit creation often
helps sustain stock market appreciation. The US stock market has not required leverage to
sustain its advance in this current cyclical bull market and that has been a good thing because
the broad measure of financial system funding has changed precious little. But with QE about
to be shelved and cash reserves running low, the US may well need to see more private
credit creation to sustain the stock market.
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