At this point, saying that U.S. investors are whistling past the graveyard does seem a little bit like saying "This television thing is just a gimmick. It'll never take off," but what can I say? U.S. investors are whistling past the graveyard. The seemingly irresistible flow of money into mutual funds, the exaltation of large-cap stocks into supposedly risk-free investments, and the now almost laughable discounting of present troubles in favor of a brighter future that's purportedly just around the corner have combined to create a growth in stock prices that is out of all proportion to the growth in actual earnings.
The reasons for the bull market have been, of course, well-rehearsed by this point. Low inflation, low interest rates (though hardly historically low), globalization, the spread of information technology, and so on. In general terms, at least, the case for continued bullishness is not dissimilar from the case for the so-called New Economy. Just as we've enjoyed steady economic growth and low inflation with low unemployment for a surprisingly long time now, so too we're supposed to continue to enjoy an ever-rising spiral of stock prices.
The case for a real New Economy should, of course, be regarded with serious skepticism, but there are clearly things--global domination by capitalism, remarkable dedication to low inflation on the part of central bankers, capital's increasingly disciplinary role (at least everywhere but in the U.S.)--that do make a real difference in the business climate. And it would be plausible that companies should deserve higher multiples than they've received in the past if their prospects for perpetual growth were so good that buying stocks was like buying a U.S. bond. The only problem with this scenario is, unfortunately, rather glaring: U.S. corporations are not turning that blissful business climate into profits.
Earnings growth for the S&P in the first quarter was somewhere between 0 percent and 4 percent (depending on how you account for write-offs, one-time sales, etc.), and earnings growth for this quarter is now estimated to be somewhere around 2.5 percent. Needless to say, the S&P is up considerably more than 6 percent this year, even as the Nasdaq--which is laden with companies that have been hard-hit by the crisis in Asia--has now hit an all-time high.
Bulls argue that investors are now looking ahead, and seeing stronger earnings growth in the next few quarters. But surely that means that investors five or six months ago were dramatically overpricing stocks, since they weren't anticipating stagnant earnings. More than that, though, the Street is proving remarkably tolerant of floundering companies. Take Nike, which last week reported its first quarterly loss in 10 years, and which even with a major restructuring charge earned just four cents a share, down from 52 cents a year ago. Nike also said that a turnaround in its business was still a year away, and that conditions in Asia had not improved at all.
So what happened? Three brokerage houses raised their recommendations on Nike to "strong buy," and the stock jumped 3 ® points. One analyst actually cut her estimates on how much Nike would earn in the coming year and still boosted the stock to a "strong buy," saying she expected something called "an uptrend." Now that's wonderful whistling.