The Oil story and earnings:
The simple fact that oil is now trading somewhere around $47 per barrel (WTI) has taken a great deal of pressure off the oil stocks.
Having been a net negative effect on earnings for the S and P 500 in 2015, they will likely turn the corner in 2016.
Richard Bernstein advisors points in their notes of 6/13 that quite often an earnings recession is followed by a pretty strong upside in prices. While many now point to high price earnings multiples, Bernstein advisors reports that
even after the upside growth of stock prices multiples actually come down because earnings return so strongly.
Certainly Bernstein is bullish but I have heard so many bearish/negative scenarios that his work is refreshing.
Valuations:
I also must admit that I laugh when people talk about historic P/E ratios being high.
When you hear this your correct response should be "as compared to what?"
Let's say that the price earnings ratio of a particular company is 22. Seems high?
Well let's look at the 10 year treasury yield of 1.6% which is much lower than we have seen in the past 50 years (Wooden TC2000).
A price earnings ratio of 22 translates to a 4.5% earnings yield. Now of course there is more risk to stocks but this is not a bad spread between the earnings yield of this stock and the 1.6% for the 10 year treasury.
The reason I believe the market is challenged is that it is currently worried about how sustainable these profits might be. If they are not sustainable then my comparison goes out the window.
But this is why you see many people migrating toward utilities and other "boring" firms that might have greater stability in their revenues.
I tend to believe that many well run companies will continue to generate these returns.
Technology has not only allowed firms to target customers more effectively but have built efficiencies into operations that yield cost savings and better profits. As with everything, we shall see.
