With nearly half (247 of 500) of S&P companies reporting first quarter statistics so far, corporate earnings are 7.1% above analyst consensus forecasts and 18.4% higher than the already strong earnings figures of the same quarter in 2010. In addition, top-line revenues are up 8.9% year-over-year, 1.8% above already lofty expectations. Nearly three out of four (73%) companies delivered a “positive earnings surprise” in the last quarter, while 69.7% delivered a positive revenue surprise. This news pushed the market higher.
A soft U.S. dollar boosts the earnings of many multi-national companies. Since most of the S&P 500 companies have foreign operations, they are reporting a growing share of their profits in terms of stronger foreign currencies. And since the average technology company is multi-national in scope, the Nasdaq benefits even more from a weak U.S. dollar.
Bespoke Investment Group (BIG) puts more numbers on this correlation: They cite an inverse correlation between a company’s revenue surprises and the size of their U.S. revenue exposure. Among companies that generate 100% of their revenues within the United States, 53% exceeded sales forecasts, versus 74% overall. In other words, the earnings of an insular (U.S.-only) company will lag a multi-national firm’s revenue.
Gold and Silver Mock Bernanke’s Blarney
At some level, Mr. Bernanke must understand that he is the proud father of this bull market in stocks. In his press conference, he let a little of this fatherly pride show when he said, “We subscribe generally to what we call here the stock view of the effects of securities purchases, by which I mean that what matters primarily for interest rates, stock prices, and so on is not the pace of ongoing purchase, but rather the size of the portfolio that the Federal Reserve holds, so when we complete the [QE] program … monetary policy easing should essentially remain constant going forward from June.”
In other words, QE will continue.
Gold and silver responded to the Fed chairman’s words with sharp rises to $1,570 and $49.50 an ounce, respectively. The precious metals vetoed the chairman’s claim that price inflation is just “transitory.” The price of a gallon of gasoline was $1.83 when the dollar peaked in early 2009. Now, it’s over $4 a gallon.
If inflation is “transitory,” it has been transitioning higher for about 12 years now. In 1999, oil bottomed at $10 a barrel, gasoline was 88 cents a gallon, silver was under $5 and gold was $253. Over the next two years, despite a dot-com bubble, inflation stayed low, the dollar was king, and we had a federal budget surplus. Then, Fed chairman Alan Greenspan overreacted to 9/11 by keeping the Fed funds rate low (under 2%) for over three years (from October 2001 to November 2004) during an economic recovery. This long run of near-zero rates fueled the real estate bubble and all the painful unwinding of mortgage debt since 2007.
So, here we are in a new recovery, fueled by super-low interest rates and Herculean rounds of quantitative easing. No wonder the dollar is sinking, while gold and stocks are soaring. Industry analysts now expect S&P earnings to rise 15.6% in 2011, followed by another 14.3% gain in 2012 to $112.75. A modest P/E of 15 indicates a record S&P near 1,700 by early next year. This V-shaped recovery in corporate profits is driven by rising exports, made possible in part by a weaker dollar and a strong global recovery. (Since the dollar began falling a decade ago, exports have risen 66.5%.) A sinking dollar isn’t all good, of course, but it certainly has worked wonders for U.S. exporters and investors in U.S.-based multi-national stocks.