Guest Haymaker
Deluard Returns...
Good morning, Readers and Subscribers:
Today, we’re happy to once again be sharing the work of my brilliant friend and the Director of Global Macro Strategy at StoneX, Vincent Deluard.
When you read a piece by Vincent, you know to expect detail-rich analysis, intricate charts, and enough content to constitute several days worth of financial research. In his recent piece, which we are confident our subscribers will appreciate, Vincent employs an interesting thought experiment to generate a better understanding of the current state of earnings. It entails examining the topic from the minds of four inquisitive (and imaginary) thinkers: an economist, a statistician, an accountant, and (for good measure) a cynic.
While these mindsets encompass different intellectual modes and practices, they tend to create distinctive ways of understanding the world and its interconnected phenomena. In analyzing any high-finance subject, a person is advised to interpret such subjects from at least a couple of perspectives. In today’s piece, Vincent has provided us with four… and several of his useful charts, of course. (Some of you may notice this includes the stunning chart on insider selling we ran on Monday.)
One of the reasons this piece caught my attention is that, unlike nearly all Wall Street strategists (ex-Morgan Stanley’s always realistic Mike Wilson), Vincent homes in on the link between massive federal deficits and corporate earnings. The inarguable fact is that when U.S. government red ink explodes, it should turbo-charge corporate earnings. Yet, the other inescapable reality is how flat S&P profits have been for nearly two years, despite that immense (and unsustainable) lift.
Our paid subscribers have a lot of Deluard material to get through, so we’ll cut our section short. Enjoy the read and consider posting a comment on your way out.
David “The Haymaker” Hay
Four Troubling Questions about Earnings
Vincent Deluard
1 – S&P 500 index profits have not grown in the past 18 months, despite a 10% surge in nominal GDP
2 – The spike in the deficit and drop in the savings rate should have led to a surge in corporate profits
3 – Nvidia’s earnings are other companies’ capital expenditure, which will be depreciated over time
4 – Buybacks are low while insider selling and stock-based compensation soar – a vote of no confidence in the rally
“A rise in wages, from an alteration in the value of money, produces a general effect on price, and for that reason it produces no real effect whatever on profits.” D. Ricardo, On The Principles of Political Economy and Taxation, 1817
Gone are the days when Bloomberg forecasted a recession with a 100% probability! Analysts’ projections, companies’ guidance, and quarterly calls point to a bright future of steady growth and permanently higher margins boosted by the AGI revolution. 76% of S&P 500 companies beat earnings this past quarter. S&P 500 EPS are expected to soar by 10.3% this year and 12% in 2025.
Actual numbers tell a different story. The trailing twelve months GAAP earnings of S&P 500 index companies have been essentially flat since the summer of 2022, 38% of Russell 2,000 index stocks posted a loss this past quarter, and NIPA margins fell to their 20-year average.
This report will ask four simple-but-disturbing questions about corporate profits.