Welcome to the Golden Eagle Eye - Eye on the Stock Market segment featuring macroeconomic and stock market commentary. We have Robert Zuccaro with us, Founder & CIO of Golden Eagle Strategies. He is a quant pioneer specializing in aggressive growth stock investing and author of the book "How Wall Street Reshaped America’s Destiny."
If you look at the first quarter, you will see that the S&P was up 7%. And of the gain in the S&P, the 20 biggest stocks accounted for an increase of $2.1 Trillion in net worth of the S&P. If you look at the other 480 stocks in the S&P, they have contribute a gain of not $2.1 Trillion but in aggregate gain of a mere $170 Billion. So the gains in the market have been compressed into a handful of companies, and these handful of companies have among the worst earnings trajectories, and in a lot of cases, they've been reporting negative earnings growth.
So the hallmark of top-performing stocks is profits growth. It has nothing to do with P/Es – and one of the arguments today against the stock market is that the P/E for the stock market has gone up and the stock market is selling at a historically high P/E of 21-22 times. Now, the flies in the ointment here is that we have entered an era of permanently high P/Es in the stock market because of the impact of technology not only on the economy and the business landscape but also on the stock market.
Was 2008 a good year or a bad year for the stock market? Profits dropped 40% in 2008. When profits drop, the P/E expands exponentially and the highest P/E in the stock market is when corporate profits are at their worst. So, the other fly in the ointment about this observation about a high P/E, corporate profits right now are trending down, which means that all things being equal, the market is staying the same and going nowhere - the P/E has to go only one direction and that’s up.
Every one of these ratios, which is widely used, is a snapshot in time. And all you need to know about these ratios:
All these ratios are subservient to profits growth rate. And most of the world doesn't know this, 80% of the world wants to rely on P/E but it's the wrong metric.
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This transcript was generated by software and may not accurately reflect exactly what was said.
Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offer or a solicitation of an offer for investment.