Armo has a post out looking at the market relative to earnings.


The argument which relates to the earnings chart is this one:

And on top of that, the $FED is tapering with the expected plan of ending purchases near the end of the year. So unless the market is completely irrational and can’t price that information in, the argument that the Federal Reserve is blowing a bubble is just ludicrous.

The Fed, through a number of QE operations has significantly expanded its Balance Sheet. It is a question of causation, viz, did the expansion in money supply cause the increase in earnings? If the answer is yes, then, will a contraction in the money supply cause a decrease in earnings?

If the money supply increased by any arbitrary number, say 10% compounded per annum and the market share of a company remained constant, would revenues increase? Conversely, if the money supply growth was reduced, would revenue expansion slow?

Taking AMZN as an example.

chart (1)

Certainly the correlation looks strong on an annual basis during the expansionary years. With the contraction, the lag is apparent but can be seen more clearly in the quarterly data:


Of course one example is hardly conclusive of anything.

chart (2)

chart (3)

Of the more than 1,500 companies that have reported earnings so far [Q1 2014] this season, 60% have beaten earnings estimates and 56% have beaten revenue estimates. Below is a look at the earnings and revenue beat rates by sector.

beat rates 2014

eps revs

On the evidence, as QE expanded, so revenue growth expanded. Now with QE contraction, so revenue expansion is slowing. The market which anticipates and moves faster, is potentially ready to reprice…hence the sideways movement.

If the trend lower in revenue growth continues, and the market valuation is staying high, the repricing will likely be lower as the market reverts to lower earnings growth.

So in answer to his question can it get better? Yes, it could be a lot better. QE tapering is not bullish.