The Fate Of The Rally Now Rests In The Hands Of The US Consumer

A funny thing happened on the way to QEternity - multiples expanded by an aggressive 2x to reach their highest in two years as the print-gasm hope was 'priced in' to the nominal value of the US equity indices (and fundamentals didn't matter). During this period, which was all about anticipation of the Fed, the real economy (that is earnings and revenues) have been disappointing. From here, now that Ben has blown his eternal wad, it is up to EPS and multiples - which leaves us with a little problem. As the chart below shows, the next few quarters are the very picture of hopes, dreams, and unicorns as Q4 EPS is somehow magically expected to stop a straight line decline in YoY profits - and soar by 10%. The driver of this miracle is the good old US Consumer - as discretionary spending now accounts for 100% of the expected EPS growth and 300% of the revenue growth for the post-election, pre-year-end extravaganza that is the lame-duck 'fiscal-cliff'-denying lead up to the holidays.

S&P 500 Fwd P/Es have surged from just over 12x to over 14x in the last few months - and now stand at multi-year highs - print this and keep it in your pocket for the next commission-taker that says 'stocks are cheap' in his regurgitatory manner...


The upper pane shows S&P 500 (orange) and Consumer Discretionary (black) revenue growth. Note how in the past these have tracked quite closely - and yet suddenly as aggregate revenues plunge, discretionary revenues will grow exponentially!!

The lower pane shows the EPS growth expectations for the next few quarters. Discretionary accounts for the entire rate of growth of the S&P 500 in Q4


Do You Believe In Miracles?