Don’t let inflation fears dominate your investment thoughts. Save time to worry about earnings growth, too.
Below, some statistical bellyaching and portfolio defeatism, plus one Wall Street bank’s top stock picks for the times.
Fourth-quarter reporting season is about 80% over, and the results are solid enough. Most companies have beaten expectations, and earnings per share are on track to rise 26% from depressed levels a year ago. That marks the end of easy comparisons, however.
During the current quarter, earnings are expected to grow by just 5%. The full-year estimate is a bit brighter at 8%, but don’t count on it. Historically, February’s consensus for full-year earnings has overstated the actual number by an average of five percentage points, according to BofA Securities. If we assume just 3% earnings growth in 2022, the
is priced at 21 times forward earnings.
Near-zero interest rates have made pricey shares a good deal over the past decade, but now rates are headed up. Inflation is the hottest since 1982, and the financial press is running out of pop-culture references to make the point. I’ve personally burned throughE.T. and the Commodore 64. The Federal Reserve needs to act before I get to Q*bert.
Goldman Sachs just boosted its estimate for rate increases to seven this year from five. It reckons the Fed will move a quarter point at a time, but half-pointers are possible, too.
Hang on: Aren’t low bond yields telling us that inflation will come down quickly? Yes, but there are three problems with banking on that. First, yields have been tiptoeing higher. The one on the 10-year Treasury note has climbed from 1.8% to over 2% this month. Second, as of this past week, the Fed was still buying Treasuries to suppress their yields. It plans to stop, of course, but only after a few more weeks, so as to not damage the economy by appearing to show too much alarm over the damage it’s causing to the economy.
The third problem with listening to Treasuries is that they don’t seem to know anything. Jim Reid, the top credit strategist at Deutsche Bank, recently plotted historical 10-year Treasury yields against what the inflation rate turned out to be over the following five years. The pattern looked a bit like a milkshake made with the blender lid off. There was just a hint of predictive power at yields below 6%, and it was negative. In other words, Treasury yields now are probably saying nothing, although they could be gently whispering that investor returns from here are likely to stink.
I’m not lightening up on stocks. Starting valuations are a poor predictor of one-year returns, history shows. Plus, every time I write a slam-dunk, can’t-miss thesis on why the market is headed lower, you pranksters run prices straight up to make me look foolish.