September 8th Weekly Market Update
Summer vacation is over and children are going back to school. As kids return to the classroom to learn the fundamentals of the “three Rs” (reading, ‘riting, and ‘rithmetic — but clearly not spellin’), in this commentary we return to the basic fundamentals of investing and look at some of the basic drivers of stock prices. To do that, we discuss our own version of the three Rs that underpin our positive stock market outlook for the balance of 2014: revenues, reinvestment, and renaissance.
- Revenues— as in corporate revenues. Revenues drive corporate profits, and profits are the key fundamental driver of stock prices. Our 2014 earnings outlook remains positive based on several factors discussed below.
- Reinvestment— as in reinvestment of capital. We believe companies are poised to increasingly reinvest in their businesses and drive future growth.
- Renaissance— as in manufacturing renaissance. The U.S. manufacturing sector has staged an impressive rebound from the depths of the financial crisis and is experiencing what many have called a renaissance, or rebirth. We believe these three Rs are all key components in evaluating the opportunity for further stock market gains.
If earnings or profits started with R, we would have gone that route here. But as we move to the latter stage of the business cycle, and with margins at record highs, opportunities for companies to further expand their profit margins will likely be limited. Therefore, revenue and profit growth will likely continue to converge as they have done in recent years. When you make a corporate equity investment, what you’re really buying is a piece of a company’s future earnings. Those earnings are ultimately what justify the price you pay for a stock. Accordingly, we believe the best way to assess fundamentals of the stock market as a whole is to try to predict earnings for the broad market — certainly no easy task. While we look at many factors when forecasting earnings, our favorite is the Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI).
For the full article: Back to School With the Three Rs: Revenues, Reinvestment, and Renaissance