Bloomberg reported today "that profits in the Standard & Poor’s 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 6 points of last year’s peak" (bloomberg). The S&P`s price-earnings ratio shrunk to 14, well below the five-decade average of 16.4. Earnings in the S&P 500 have more than doubled to $96.58 since 2009, wrote Bloomberg in another report (bloomberg). The earnings yield, or annual profits divided by price, climbed to 7.1%, 5 percentage points more than the rate on 10-year Treasuries.
The shrinking price-earnings ratio is a sign of the rampant pessimism. It seems that many investors don`t trust the steeply rising profit trend and underestimate the capability of U.S. companies to expand their earnings significantly in the coming years. But the rising profit trend is the proof that successfully managed companies are learning organizations which adapt to their changing environments and are capable of unlocking new profitable markets.
The steeply climbing earnings confirm that the average S&P 500 company is getting more & more efficient and productive. Costs of production are shrinking in relation to revenues. The accelerating technical progress, which is getting more and more important, also reduces costs of production, especially when a huge amount of data has to be processed.
Both developments translate into rapidly rising earnings even in a sluggish economy. Technology companies like Apple and Intel also use innovations to create new markets and attract more customers. And: A lot of S&P companies benefit from China, India and other countries in Asia and Latin America which show a growing appetite for American brands and quality products.
Because these developments are strong and sustainable the rising profit trend should continue for years. The current depressed prices on the stock market could be huge bargains.
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