Business

Good and sustainable corporate earnings pushing markets higher

Hayder Tawfik

Global economic macro pictures plus central bank’s monetary policies are extremely positive for stocks but the main factor pushing stocks higher is good quality and sustainable cooperate earnings. This is where equity investors should focus their attention and benefit form market rallies.

First signs for 4th quarter and 2017 earnings are quite encouraging. They are very constructive and very much bullish sign for further market rally. The S&P 500 now is trading on a Price Earnings Ratio of 18.5x for 2019. This ratio has been coming down over the past few years with the main markets achieving record highs. The US financial markets are just started pricing in the $1.5trillion corporate and individuals tax cuts plus the weakness of over 10 percent of the dollar against major currencies through 2017. Equity investor has a big support in the figure of the President Donald Trump. He is on course to deliver his economic agenda that is very friendly to the financial markets and supportive of US corporates. Equity investors who have for the past few years been bearish on the stock markets could miss out on further gains.

Most world stocks markets have been rising while their valuation been declining. Most of the stock market increases has been led by great earnings momentum. The word momentum literally what is driving the markets higher. This is extremely bullish for the global stock markets.

The economic fundamentals are continuously getting better but have been slower than expected. What has been a great surprise is that in such slow economic environments, corporate earnings have been doing very well. This because the global economy is on the mend and has been doing reasonably well. Equity investors have taken notice and been pushing more fresh money into the stock markets.

Global stock markets rally since the lows they reached in 2007-2008 have been on the back of a wall of worry. This is a classic example of bull market rally that splits investors into two camps. Those who have been negative and expecting a big correction and those who see through all the worries and position themselves to benefit for the good fundamentals and great corporate earnings.

This great stock market rally is no different from previous ones. Those who are still have doubt should remember that most markets have just surpassed the previous highs that reached back before the crash of 2007. Whereas corporate earnings have been hitting new highs.

How much of the good corporate earnings are discounted in the stock markets is something to be seen in the coming months. However, as I said earlier as long as corporates delivering increases in revenue and earnings, markets will grind upwards but may be on a slower space. Equity investors should focus on good quality earnings and find out what exactly driving these increases in corporate earnings. Earnings that are driven from pure operational activities are worth more than those that resulted from share buyback, cost cutting or acquisitions. I personally do not see much disrupting the rally that is driven by increase in corporate earnings. @Rasameel

By Hayder Tawfik

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