Evening Brief – 06.30.23

Approximately 54% of company stocks in the SP500 are trading more than 20% below their 52-week highs, evidence of weakness in the market despite the 14% advance – largely led by technology stocks – in the index since the October 2022 lows.

Considering the recent equity market movements, one may want to focus on US Treasury yields versus the earnings yield of the index. When one looks at the consensus estimate of $220 operating earnings for 2023, the earnings yield, which is the inverse of the Price-to Earnings ratio and allows one to compare it directly with US Treasury yields, the six-month Treasury bill is yielding 5.42%.

Meanwhile, the SP500, based on the $220 operating earnings estimate, is producing a 5% return. You have a risk-free rate of return that’s giving you 42 basis points above the earnings consensus number. We note that there are analyst estimates of even lower operating earnings, which would only widen the yield gap in favor of Treasury bills.

So, we’re in this environment where a lot of stocks, again with the exception of tech stocks, which appear to be rolling over, have already come down from their peaks and are not moving much. The median stock price on the NYSE so far this year is only up 3%, frustrating many portfolio managers.

It wouldn’t take much selling or profit-taking in the mega cap stocks to give a bid to the broader market, however. The broad market isn’t even close to where the SP500 is trading, where you have a 19x multiple.

There are three ways to raise funds for the next stage of expansion. 1) You can earn it; however, it appears we have already reached top earnings. 2) You can obtain money from a bank, but lending standards have tightened significantly because of SVB and regulatory worries, or 3) you can get it from your assets. But even with the SP500’s gains, you’re still well below where you were when the market peaked.

It’s not so much about betting against the stock market rally. The question is, do you want to bet with it when you can’t find the money to support the next level of expansion?