“Kee” Points with Jim Kee, Ph.D.

The S&P 500 briefly hit an all-time high last week at 1991.39, leading many to speculate that the “psychologically important” 2000 level will be exceeded shortly (Jefferies). Of course, anything that has an upward trend over time (like the stock market) will regularly hit all-time highs, so don’t pay too much attention to those sorts of headlines. But the stock market is a pretty good - albeit imperfect - barometer of how things are going and where they are headed.

 

A lot of this has to do with earnings. Remember that this is “earnings season,” which happens four times a year as companies report their profits or “earnings” from the quarter just completed, which in this case is the second quarter of 2014 (ended June). Close to half of the S&P 500 companies have reported thus far, and the majority (2/3rds) of those have beaten the consensus expectations for both sales (“topline”) growth and earnings (“bottom line”) growth. That’s important, because a lot of the market’s upward movement thus far has been driven by “multiple expansion” (e.g. increasing price-to-earnings ratios or multiples), meaning that the market is paying more for a given dollar’s worth of earnings. Most analysts feel that this multiple expansion has pretty much run its course, and that going forward it will be earnings and sales growth that drives the market. That’s certainly my view, but of course it is never that black and white. By the way, “consensus estimates” means the average of the estimates provided by individual Wall Street (i.e. major brokerage firm) analysts. Companies like Thomson Reuters’ First Call and Zack’s Investment Research poll the brokerage firms to come up with consensus estimates (Cool Stock Data).

 

Elsewhere in the world, I would say that the most important data from a market perspective was a Chinese manufacturing survey – the strongest in 18 months – that supported the recent release of China’s 2nd quarter GDP growth rate (Barron’s). That number came in at 7.4%, pretty much in line with China’s official target of 7.5%. At the beginning of the year I noted in Kee Points that China will probably hit its 7.5% growth target this year, but make no mistake about it, China is slowing. That is what’s important going forward, not the (silly, in my opinion) spurious precision of official GDP numbers. And that means that global commodities and materials will have to be evaluated based upon normal cycles for those industries, not the brief China-driven supercycle of the 2000s. Nevertheless, emerging markets in general are still contributing the most to world growth, with some analysts expecting them to account for more than 70% of global growth over the next few years (Capital Economics).

 

Finally, the big news this week will be the 2nd quarter GDP growth numbers for the US, which will be released by the Bureau of Economic Analysis (BEA) this Wednesday, July 30. The consensus (Bloomberg survey, in this case) is for about 3.25% growth, a big jump from the first quarter’s negative -2.9% number. The highest estimate for the 2nd quarter is 5.8%. The lowest is 2.1% (the lowest I have seen outside of the Bloomberg survey is Gary Shilling’s .1% forecast in Business Insider). Just watch the headlines on Wednesday morning−you can’t miss it.