So what is driving the market higher and higher?
If it was pure business fundamentals, like I mentioned in my last blog post, then companies should be doing extraordinarily well. Retailers should be announcing increasing same store sales and foot traffic. Manufacturing should be high with companies like Caterpillar building machinery like crazy to satisfy demand. Employment should be high, with the majority being in higher paying industries rather than retail or fast food. Essentially, the economy should be strong, GDP should be growing at a healthy pace, and major foreign markets should be equally positive, being that we’re part of a larger global economy. So what is reality? Unfortunately, very little of what I just described is actually happening. The economy doesn’t appear to be as strong as market prices would indicate.
Earnings Are Decreasing.
In general, company earnings have been decreasing for over a year. If we look at the S&P 500 Index as a whole, 12-month earnings peaked in Sept. 2014 at $106, and subsequently dropped almost 19% to $86 by Mar. 2016. Meanwhile, the market price increased by over 10% from Sept. 2014 to Aug. 2016.