The S&P 500 achieved a record high last week of 1633, driven by better-than-forecast first quarter earnings. The “beat rate” – the percentage of companies that are posting numbers better than consensus – was 69% this quarter, higher than the 62% historical average.
S&P companies drove the index to a record high of $26.62 per share last quarter, up from the previous record of $26.36 in the fourth-quarter 2012, according to S&P Capital IQ. This record growth was in spite of fears that budget cuts due to “sequestration” and the end of the 2% payroll tax holiday would cause economic growth to slow or stall.
As a result of these earnings, the S&P 500 index is trading at a price earnings ratio of 15.3, currently at 1,630. Well within the normal range by historical standards, S&P results indicate that record-high stock prices are still reasonable compared to earnings.
These earnings are far from impressive. Revenue for these companies only grew about 2%, so the earnings did not come from expanding sales. Second, large companies have been buying back shares, increasing earnings per share without growing the bottom line. Third, investors should expect revenue and earnings to grow by at least the inflation rate of 1.5% to break even. Finally, much of the earnings increase came from cost control, which although good for investors and the bottom line does not point to a strengthening economy.