Bend the knee. Kiss the ring. Whatever you do, pay the U.S. equity benchmarks their due. At least that’s the CliffsNotes version of a Thursday research report from Jefferies analyst Andrew Adams.
Amid the waning period of second-quarter corporate results, which has mostly come in hotter than Wall Street had expected, Adams says 97% of corporate profit growth has been derived from better sales and margins. That leaves just about 3% of earnings-per-share growth, or EPS, from the oft-maligned share repurchases.
Check out: Opinion: Stock buybacks are no reason to buy a stock
Adams captures it this way:
S&P 500 consensus bottom-up operating earnings estimates for this year and next currently stand at $158 and $176, respectively, up from $146 and $160 at the beginning of this year (source: S&P). What’s more, despite all the trade policy uncertainty, analysts have not been cutting their outlooks lately on an aggregate basis. And even with the lofty projections inherent in the 2018 market, 80% of S&P 500 companies were beating 2Q earnings estimates coming into this week, the highest beat percentage since FactSet began tracking the data in the third quarter of 2008.“…[W]e still believe many investors are underestimating and downplaying the impact of our current (and expected) earnings environment,” the Jefferies analyst writes in a note entitled “The Stock Market Has Earned Its Gains.”
However, so far Wall Street investors are skittish about pushing equities much higher, with the earnings period winding down and trade clashes between the U.S. and China still in the ether.
That said, the S&P 500 index SPX, +0.01% is within shouting distance of eclipsing its all-time high set Jan. 26, the Nasdaq Composite Index COMP, +0.29% remains about 22 points, at last check, from its own record, last set on July 25 and the Dow Jones Industrial Average DJIA, -0.13% is hovering near its highest level since Feb. 26.
Stocks got rocked back in February, sending the Dow and S&P 500 into correction territory, defined as a drop of at least 10% from a recent peak, and have been clawing their way back over the past six months. The steady, if not volatile, ascent hasn’t come without constant drumbeat of consternation. Those worries include worries that the market’s breadth is too narrow—meaning a small number of large companies were driving gains—and that recent advances were bound to deflate, given that the bull market is in its 10th year and the economy is in its ninth year of economic expansion, and that trade tensions between China and the U.S. would whack global economies—eventually.
One of the main criticisms of the market dynamic is that stock buybacks have been the straw that has stirred Wall Street’s equity-market cocktail.
Adams, however, wants to dispel that notion in the near term.
“Earnings are good. And when earnings are good, it’s hard for stocks to be bad,” he writes.
Read: Stock market to get $1 trillion boost via buybacks, says Goldman
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