Posted: July 3rd, 2015

Economics: S&P 500, P/E Ratio and Earnings Per Share

Please read the information in the file titled “Required Information.” What are they discussing and what bearing do they have to the material in Module 5 (S&P 500, P/E Ratio and Earnings Per Share)? In other words – what are the current and future implications of the information provided in the reading for the S&P 500, P/E Ratio and Earning Per Share? Then, talk about the possible implications on the economy as a whole. Please use 1” margins. No other sources are required other than the provided readings. Please provide original answers. Thank you.

 

1. Revised GDP and Profits Data (June 24)

 

This morning the Bureau of Economic Analysis issued a sharply revised estimate of first-quarter GDP:

 

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

 

Note the change from negative 0.7% to negative 0.2%:

 

“Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — decreased at an annual rate of 0.2 percent in the first quarter of 2015, according to the “third” estimate released by the Bureau of Economic Analysis.  In the fourth quarter, real GDP increased 2.2 percent.

 

“The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month.  In the second estimate, the decrease in real GDP was 0.7 percent.  With the third estimate for the first quarter, exports decreased less than previously estimated, and personal consumption expenditures (PCE) and imports increased more (see “Revisions” on page 3)…..”

 

There was little change in the Bureau’s estimate of first-quarter after-tax profits, which rose slightly to $1,891.2 billion:

 

http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=53  (Row 45)

 

The table indicates a leveling-off following sharp gains.

 

Corporate Profits

(Recessions shaded)

$Billions:

2011

First Quarter           1,399.2

Second Quarter      1,466.1

Third Quarter          1,482.1

Fourth Quarter        1,545.1

2012

First Quarter           1,730.3

Second Quarter      1,724.9

Third Quarter          1,769.4

Fourth Quarter        1,796.4

2013

First Quarter           1,784.8

Second Quarter      1,760.7

Third Quarter          1,803.4

Fourth Quarter        1,786.1

2014

First Quarter           1,734.9

Second Quarter      1,842.2

Third Quarter          1,894.6

Fourth Quarter        1,837.5

2015

First Quarter           1,891.2

 

2. Manufacturers’ Earnings Fall (June 8)

 

Today the Census Bureau reported seasonally-adjusted first-quarter 2015 manufacturing earnings of $128.6 billion and margins of 8.05 cents per dollar of sales:

 

http://www.census.gov/econ/qfr/mmws/current/qfr_mg.pdf

 

The charts and table show this is a setback. The next scheduled data-release is September 8. We’ll see if this setback was noise in the data or an omen.

 

Manufacturers’ Profits

(Recessions shaded)

 

Manufacturers’ Profit Margins

(Recessions shaded)

 

Here are the figures we have reported in the past, together with today’s update.

 

Earnings in billions of dollars and margins in cents per dollar of sales, both seasonally adjusted:

 

2013

First Quarter           151.2            9.04

Second Quarter      143.6            8.54

Third Quarter          147.9            8.72

Fourth Quarter        158.7            9.29

2014

First Quarter           139.0            8.20

Second Quarter      153.6            8.87

Third Quarter          166.2            9.44

Fourth Quarter        154.1            8.93

2015

First Quarter           128.6            8.05

 

 

 

 

 

 

3. Tech Bubble? (May 13)

 

Now that NASDAQ has – once again – gained 5000, here are two observations on the possibility of another technology bubble a la the year 2000.

 

Begin with a May 11 New York Times piece, posted May 10, by Mike Isaac and Michael J. de la Merced:

 

“Uber Funding Talks Highlight the Speedy Pace of Investments”

 

com/2015/05/11/technology/uber-valuation-highlights-the-speedy-pace-of-investments.html?ref=topics&_r=0″>http://www.nytimes.com/2015/05/11/technology/uber-valuation-highlights-the-speedy-pace-of-investments.html?ref=topics&_r=0

 

The authors describe a world in which investors chase entrepreneurs, eager to fund the next-big-thing.

 

Consider this:

 

“…The pace of technological change has long been happening at the lightning-fast speed of the Internet. Now, start-up financing is increasingly taking place at that speed as well….

 

“….And the rate of fund-raising by Uber — and across the start-up landscape — has little precedent, driven by money pouring in from hedge funds, strategic investors and more, and by the willingness of entrepreneurs to embrace the cash…..

 

“….The shrinking time between funding rounds shows how Silicon Valley’s current boom is not just about start-ups reaching a high valuation but also about how fast they can pull that off. The tempo is in marked contrast to the pace of start-up fund-raising last decade, when many companies would typically leave a year or two between financing rounds…..

 

“Spurring the more frequent fund-raising is the desire of investors — including hedge funds, mutual funds and strategic investors — to put up money more often for fear of missing out on the next big thing…..”

 

Then look in the San Francisco Chronicle for this article posted by Thomas Lee on May 10 and published on May 11:

 

“Marc Andreessen is dead wrong about the tech bubble”

 

http://www.sfchronicle.com/business/article/Marc-Andreessen-is-dead-wrong-about-the-tech-6256356.php

 

Here are his cautionary words:

 

 

 

“For example, of the eight times the benchmark S&P 500 index jumped 90 percent over a five-year period, five — five — led to a stock market crash. In other words, 63 percent of the time…..

“…From 2009 to 2014, the S&P 500 increased nearly 130 percent. The tech-heavy Nasdaq index more than tripled over the same period…..”

 

Uh oh!