Materials, Industrials, and Consumer Discretionary stocks are the top sector performers in the S&P 500 since the end of September, up between 3.5 to 4.3%, which is nearly double the overall Index. This is evidence that the continuing market rally over the past few weeks, at least, has tended toward companies whose future earnings are quite sensitive to the economic cycle, with future earnings gains predicated on continuing favorable economic conditions and strength in consumer spending. Yet, current corporate profit margins are at record levels, indicating that we are probably near (at?) the apex of the economic cycle. Is the market beginning to assign higher multiples to these (presumably) peak cyclical earnings?
If a slowdown is years away and profit margins and earnings have longer to run, the companies may be worth more. But if we have a slowdown, profit margins will erode, with earnings taking a corresponding hit. I may be wrong for a while, but I’m willing to bet longer-term that because the business cycle is at or near a top, cyclical industries in general are not the best place to be investing new monies at this time.
No comments:
Post a Comment