Limtex, GDP grew in the first quarter by 5.6%, right (vs a minimal growth in the 4th Q of last year), yet, corporate profits grew by less of 1%. The big run we had n the last quarter was assuming that growth in GDP will translate to even higher growth in corporate profits (at bottoms, profit growth should be larger since more of the increased sales get to the bottom line). Now the general assumption is that the current quarter will see a growth in GDP in the 3% to 4%, and the assumption was that this should translate to an earning growth in the 8% to 10% in corporate earnings, what the market seems to be sensing is, that even with a 4% growth in GDP, corporate earnings may not grow b 10%. The pricing in equities last January (and in the DOW even now) assumed resumption in corporate growth, this assumption, for the time being is put on ice, thus the current decline in equity prices.
Now, all the above is just a "rationalization", and it is about time one learn that these rationalizations have very little to do with what the market does. In the period of 1966/82, we had continuous growth in corporate earning (even though these were interrupted from time to time by sharp contractions), yet, the Dow did not go (except two marginal excursions) above 1000 for 16 years. How do you explain such a dichotomy with your "economic model for pricing equities"? Maybe the answer is a little more complex?
Zeev |
