Weekly Stock Market And Economy Recap: S&P 500 In Slight Decline, PPI, CPI Soar

S&P 500 earnings update

S&P 500 earnings per share (EPS) showed another modest decline this past week, dropping from $214.95 to $214.77. The forward EPS is still +35% year-to-date.

92% of S&P 500 companies have now reported Q3 results. 81% have beaten estimates and results have come in a combined +10.3% above expectations. Q3 earnings growth rate remains +41.5%. (I/B/E/S data from Refinitiv)

S&P 500 price to earnings (PE) ratio ticked down to 21.8.

S&P 500 earnings yield is now 4.59%, still well above the 10-year treasury bond rate which increased to 1.58%.

Economic data review

Producer Price Index (PPI) for October increased +0.6% for the month (compared to +0.5% last month), and +8.6% annualized (compared to 8.6% annualized last month). Producer prices remain almost double the amount experienced at any point over the last decade. Still no signs of inflation moderating, as higher producer costs are often passed onto consumers.

NFIB Small Business optimism index fell to 98.2 in October, just slightly below the long term average of 98.4. Only 1 of the index components increased for the month, while the remaining 9 components either declined or were unchanged.

“Small business owners are attempting to take advantage of current economic growth but remain pessimistic about business conditions in the near future. One of the biggest problems for small businesses is the lack of workers for unfilled positions and inventory shortages, which will continue to be a problem during the holiday season.”

“The net percent of owners raising average selling prices increased 7 points to a net 53 percent seasonally adjusted. Price raising activity has reached levels not seen since the early 1980s when prices were rising at double digit rates.”

Expect a lot of volatility in this index as future policy regarding taxes and regulations get formulated.

Consumer Price Index (CPI) reading on inflation came in much higher (worse) than expected. Consumer prices rose 0.9% for the month (compared to +0.4% last month), and up 6.2% over the last 12 months (compared to +5.4% last month). You have to go back to November 1990 to find a higher annualized reading on inflation.

Consumer Price Index minus food & energy (Core CPI) rose 0.6% for the month (compared to +0.2% last month), and 4.6% over the last 12 months (compared to +4.0% last month). You need to go back to August 1991 to find a higher annualized Core CPI reading.

The gains were led by energy costs (mainly gasoline and fuel oil), and new/used vehicles and trucks on the Core CPI side. But gains were broad based throughout every category.

Notable earnings

PayPal Holdings (NASDAQ:PYPL) reported a semi disappointing quarter compared to Wall Street's lofty expectations. Adjusted EPS came in only 4% above expectations (+4% year-over-year growth), while revenues missed expectations by 1% (+13% year-over-year growth).

Trailing twelve month (TTM) metrics continue to be stellar, but its all about future expectations. The biggest miss came during the company’s forward guidance. As they lowered both Q4 and next years projections.

This is the risk when a stock becomes priced near perfection. Even solid results may not suffice. After earnings, the stock fell about 10%, and down about 35% from its recent all time high. That matched the 35% peak to trough decline during the COVID selloff.

I added to positions on the earnings gap lower. There are some short term issues between tough forward comps and the ending of the EBay relationship, but I think the Amazon (NASDAQ:AMZN) relationship will more than offset the losses over time. The short term momentum in the stock is lower, and the stock is still not cheap. I’ve no idea how much lower the stock could fall in the near term, but looking out over the next 3 to 5 years I see plenty to be encouraged about.

Summary

The Fed wants us to believe the inflation threat is a result of supply chain problems only. If this were true, price increases would be contained to a few categories. As consumers would offset their purchases of higher priced items by buying less of the rest. But that’s not what is happening today, price increases are strong across every category. Producer prices are up +8.6% and consumer prices are up +6.2%, making real interest rates look even more abysmal.

We are now being told the infrastructure bill will fix the inflation problem. Now I’ve heard it all. First, the infrastructure wouldn’t be in place for years. The inflation threat will probably be eradicated naturally well before then. Second, more government spending can not lower inflation. That’s just econ 101. It’s gains in productivity that help raise the standard of living. The COVID monetary response was the perfect example. If you give handouts, it will just increase the prices as demand outpaces supply. Leaving you no better off in the end. (And most likely worse off).