By Rick Glaze
Weathering storms, flu outbreaks and continued higher short-term interest rates, the stock market continues to move higher. Notwithstanding distractions like hurricanes and grandstanding politicians, the stock market hinges on good old-fashioned earnings. Earnings growth for the S&P 500 will likely come in around 15 percent to 16 percent higher than last year - nearly twice the historical average. Low interest rates and worker productivity are helping to fuel the bull market.
One of the most-used measures of stock market valuation is the price-to-earnings ratio (P/E). To derive the ratio, take the stock price, say, $50, and divide it by earnings, say $5, for a total P/E of 10. The P/E for the S&P 500 has been in a trading range of 13 to 17 since the market low in 2002. Based on next year’s earnings forecast, the P/E is nearly 15.5, or right in the middle of the range - neither too hot nor too cold. Profit margins hover around 9 percent, which is historically very high.
Consumer spending, which accounts for two-thirds of the economy, has been strong in the past several years, helped along by low interest rates. But as business balance sheets appear awash in cash, more spending on plants, equipment and general expansion could carry the banner of growth for the U.S. economy. Technology is integral to corporate capital spending. To stay competitive, businesses must continue to produce more and better without adding expense. The explosion in technology has allowed this productivity to fuel growth without adding inflationary pressures. Throughout the 1990s the phenomenon of high growth and low inflation disoriented policy-makers until they focused their old eyes on the new wave.
San Jose was treated to a regal visit when Hollywood producer and actor Rob Reiner stopped by, but there is no truth to the rumor that he was researching an epic documentary on Mayor Ron Gonzales titled “Honesty Is the Best Policy.” “Meathead” of the classic TV series “All in the Family” blew into town to tout a novel and creative concept - tax the rich. I don’t know how these creative types keep coming up with these new and unique approaches.
Rick Glaze is president of Glaze Capital Management of Los Altos and is a registered representative of and offers securities through First Allied Securities Inc.
