I am off to Maine today for a few days of fishing and economic debate and drinking. Before I go, I wanted to share a chart we pulled together in the office yesterday from the BBRG terminal. It was in response to the usual statement “This rally is driven by Fed printing and nothing else.”
Sorry, but I beg to differ. The chart shows that the rally has been driven — and in very large part — by a huge recovery in revenues and profits in corporate America following the financial crisis of 2007-09.
The white line shows the price of the S&P500 index from December 2007 to today. Red line is revenues, blue line is earnings. As you can see, earnings have led the rally off of the lows, multiple expansion took over in the middle, and most recently, earnings have accelerated. Higher revenues have paced higher stock prices as well.
I would be remiss if I did not acknowledge the role that lower borrowing costs lower companies’ expenses. That is a legitimate observation as to the impact of the Fed. For a variety of reasons, companies have chosen to engage in large buybacks as well, and that too plays a role.
However, the storytellers would have you ignore the enormous improvement in sales and profits in order to stick to the story that the market gains are ALL FED PRINTING ALL THE TIME.
Sorry, but that narrative fails.