As the late great Yogi Berra might say of this market, “It’s like De Ja vu all over again.” More stimulus from the global central banking cabal (ECB yesterday, Bank of China today, BOJ next week) and the fab five (Facebook, Amazon, Google, Apple, Netflix) are again driving the market to ever higher levels on the back of quarterly earnings reports. Sounds like a replay of, well, anytime over the last three years.
The gains these stocks are making on what are regular earnings surprises (h/t analyst enablers) is confounding to the serious long-term investor. Amazon is poised to add $55 per share to its stock price today on the back of a quarterly earnings report that came in about $0.30 better than analysts were expecting. Google’s stock also popped this morning on an earnings beat. Google looks like it will add $74 to its stock price on an earnings beat of $0.16. So at the circus that is the quarterly earnings season, every additional dollar Google earns above analyst estimates is apparently worth over $460 in market capitalization and every additional dollar over estimates earned by Amazon is worth $183. You don’t have to be a calculus whiz to understand this math isn’t sustainable. Prices can only outpace earnings gains for as long as investors will tolerate the foolishness. Yes, that means the “investors” in these shares are playing the greater fool game of investing.
It’s hard to be both a long-term investor in this environment and doing better than the fab-five driven S&P 500. The serious investor is advised to avoid the hype and maintain a cautious approach.
Jeremy Jones, CFA
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