Tag: S&P 500

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First Quarter Economic Reports

The US Department of Commerce – Bureau of Economic Analysis (BEA) released its GDP preliminary figures for the first calendar quarter.  Real (after inflation) gross domestic product (GDP) increased at an annual rate of 2.0 percent compared to the prior quarter.

Personal consumption increased at an annual rate of 1.6%, while gross private domestic investment increased at a rate of 8.7%.  Nonresidential structures and residential structures both declined at rates of -6.7% and -8.0%, respectively.  Nonresidential equipment and intellectual property products increased at rates of 17.2% and 13.05%, respectively.  Government consumption and investment increased at an annual rate of 4.4%.  Imports grew at a faster rate of 21.4%, compared to exports, which increased at a rate of 12.9%.

The BEA breaks down how much each GDP component contributes to total GDP growth.  Personal consumption expenditures contributed 1.08% to the 2.0% increase in GDP for the quarter.  Gross private domestic investment contributed 1.48% to GDP.  Net imports had a negative impact of -1.30% on GDP growth.

Some economic analysts are concerned that most of the GDP growth was due to investment related to the artificial intelligence (AI) buildout and returns on investment for many of the AI initiatives remain uncertain.

Personal consumption is unlikely to be a major source of economic growth in the near future as it has grown at a faster rate than personal income during the past year.  The personal savings rate has declined to 3.6% as of March 2026, which is the lowest rate since November 2022.

Federal government spending may increase substantially for the next fiscal year beginning October 1.  The White House budget request includes $1.5 trillion for defense spending, a 42% increase from the current level of $1.05 trillion.  The Congressional Budget Office is projecting that the budget deficit for the current fiscal year ending September 30 will be $1.9 trillion with total expenditures of $7.4 trillion.  The budget request is currently under review by Congress and analysts expect an “uphill battle” for approval, even with the current Republican majorities in both chambers.

According to www.multpl.com, the S&P 500 index remains at a high valuation level with a P/E ratio of 31.0 based on reported earnings for the last twelve months.  The Shiller P/E ratio which is cyclically adjusted for the past ten years is higher at 40.9.

FINRA margin debt also reflects a high level of speculative interest, at $1.22 trillion as of March 31, more than double the $607 billion for December 2022.

Research Affiliates is currently showing a projected nominal annualized return for the next ten years of 3.5% for US large cap stocks.  Research Affiliates avoids prognostications on the US economy or geopolitics.  Their expected returns simply reflect a steady state economy and a return to more normal valuation levels.

While expectations are low for the S&P 500 index, there are some stocks that sell at reasonable valuations with good fundamentals.  Companies that we own include Verizon, SM Energy, Paypal, Allstate, Danaos, and Global Ship Lease – all of which continue to report revenue growth and sell at P/E ratios in the single digits.  The exchange-traded funds that we own also have a similar value orientation.

If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA

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This Too Will Pass

As I write this on Sunday, many reports are coming out of the Middle East.  Some of them cannot yet be verified, and the future course of the war remains uncertain.  It is probably best that I refrain from expressing my political opinions on the matter.  But let’s take a look at the early impact on the financial markets.

TradingEconomics.com gathers data from a variety of sources from international markets.  As of 5:30PM MST on Sunday afternoon, they were showing the following:

DXY US Dollar Index                          +0.41%
S&P 500 Futures                               -1.09%
US 10-year bond interest rate      -0.01%
Gold                                                           +1.70%
Silver                                                        +1.31%
Brent crude oil                                    +7.46%

Our current allocation to precious metals will provide some positive ballast.  Larger accounts that hold individual stocks have two energy companies.  SM Energy and Petrobras produce oil, gas, and natural gas liquids.  SM Energy has properties in Colorado and Texas, while Petrobras has properties mostly in Brazil with a few more in Africa.  Both should benefit from the higher prices, while the major oil companies that have operations in the Middle East will have supply disruptions.

At this point, the Middle East war can be expected to have some impact on the financial markets as long as it lasts.  While Russia, China, and North Korea have provided support to Iran, none have yet taken direct military action against the United States or Israel.  I doubt that either side will accept the prior status quo.  We are likely to have a heightened level of kinetic action until one side surrenders.

Our portfolios are positioned to weather the storm.  If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA

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Economic Roundup

The Bureau of Economic Analysis (BEA) released their third estimate for the first quarter of 2025 real GDP which declined at an annual rate of 0.5%.  Private fixed investment was strong but was outweighed by the negative impact of imports in anticipation of higher domestic tariffs.  The price index for gross domestic purchases increased by 3.4%.  READ MORE

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U.S. Corporate Profits

S&P 500 earnings declined in 2022 by 18.0% and subsequently increased by 7.8% in 2023.  Standard and Poor’s currently estimates that 2024 earnings for the S&P 500 index will be $216.61, representing 10.6% growth for the calendar year.  At the current price level of 5,283.4, the S&P 500 Index sells at 24.4x 2024 estimated earnings.

There has been much commentary about the “Magnificent 7” (Microsoft, Amazon, Meta Platforms, Apple, Alphabet, Nvidia, and Tesla).  The Magnificent 7 sell for roughly twice the P/E ratios than most other US stocks.  While five of the stocks have high growth rates, Apple and Tesla have negative revenue growth when we compare the most recent quarter to a year ago.

Richard Bernstein Advisors (RBA) has this to say in their commentary about the divergence between the large cap tech stocks and the rest of the stock market.

Our work in the early-1990s demonstrated that stock market leadership narrows when profits cycles decelerate because fewer and fewer companies can accelerate or even maintain growth in an increasingly adverse environment.  Markets effectively reflect Darwinistic survival of the fittest as earnings growth becomes increasingly scarce.

However, the opposite occurs when profits cycles accelerate.  Markets tend to broaden as the cycle accelerates because an increasing number of companies are growing, and investors become comparison shoppers for growth.

RBA notes that a high percentage, 32% of S&P 500 companies, have more than 25% earnings growth based on the last 4 quarters.  In their opinion, “profits are accelerating and credit conditions remain healthy.”  They expect the performance of the stock market to broaden and the Magnificent 7 to “substantially underperform.”

The Atlanta Fed’s GDPNow forecast for the second quarter has declined during the last month from 4.1% to 1.8%.  A slowdown in economic growth will make it difficult to sustain earnings growth for many companies.

One of the reasons why small capitalization companies have been underperforming the S&P 500 since 2021 is that they typically have a higher debt load with a greater proportion of variable rate debt.  Interest rates have been rising since June 2020, so small companies with more interest-sensitive debt have suffered.  According to Pacer Financial, an ETF provider, the S&P Small Cap 600 has net debt/EBITDA (earnings before income tax, depreciation, and amortization) of 3.5 compared to 1.4 for the S&P 500.

Pacer’s US Small Cap Cash Cows ETF (CALF), which is included in many portfolios, has a lower ratio of net debt/EBITDA at 1.26, but sells at a more attractive valuation than either index.  CALF has a price/free cash flow ratio of 8 and a price/earnings ratio of 11.

While there are reasons to be concerned about the economic future of the country (see my May 3 blog, “Prepare for All Eventualities), some stocks offer better fundamentals and more attractive valuations than other stocks.  Also, we deal in a world of probabilities rather than certainties, and an allocation to common stocks makes sense as a hedge against inflation.

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA

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What’s Next?

US real (after inflation) GDP declined by 1.6% in the first quarter of 2022.  According to the Atlanta Federal Reserve Bank’s GDPNow model as of July 1, second quarter real GDP is forecast to decline a further 2.1%.  The Blue Chip Economic Indicators consensus forecast of economists for real GDP was a full 5% higher at the end of May than the latest forecast of the Atlanta Fed’s model.  There are likely to be substantial reassessments by economists and securities analysts during the next few months.

The current P/E ratio of the S&P 500 Index is at 19.3 based upon the last 12 months of reported earnings.  The P/E ratio of equities held in client portfolios is lower than the S&P 500 due to my value orientation.  The P/E ratios of some stocks are substantially lower than the rest of the stock market.  For example, US Steel (X) sells at 1.0X trailing 12 months earnings, or 1.5X forecast earnings.

Year-to-date, the total return of the S&P 500 is -19.1%.  Since the Fed is expected to raise interest rates further and there is a high probability that we are in a recession that will impact corporate profits, the S&P 500 Index is likely to decline further during coming months.

The potential catalyst(s) for a turnaround in the economy are difficult to identify.  Here are some current economic indicators:

    • The consumer price index (CPI) is currently 8.6% higher than a year ago, and it is expected to remain at an elevated level for the near future.
    • The University of Michigan’s consumer sentiment index hit a record low, as the high inflation rate is hurting household finances.
    • Real (after inflation) wage growth on a year-over-year basis is lower at -3.9%.
    • The market capitalization of US equity markets has declined by $13.6 trillion since its peak at the beginning of this year.
    • The interest rate on a 30-year fixed rate mortgage is now at 5.81%.
    • Corporate profit margins are at record high levels but are likely to be under pressure from higher wage and material costs and a recessionary environment.

Meanwhile in Europe, the antagonism between NATO countries and Russia may soon get worse.  Russia has already reduced Nord Stream 1 gas flows by 40% while citing technical issues.  Gazprom then announced that they have scheduled an “annual maintenance” for a period of ten days from July 11 to July 21, that will shut down gas deliveries.  This should serve as a painful reminder to the NATO/European Union countries that they rely on Russian energy exports.  Germany and Italy together account for almost half of the European Union’s gas imports from Russia.  France, Hungary, the Czech Republic, Poland, and Austria are also large natural gas importers.

Some European companies have already hit their breaking point.  Germany’s largest gas importer and power utility, Uniper, is now seeking a 9 billion euro bailout package from the German government.  Uniper’s share price has declined by about 75% since the beginning of the year.

For now, the European energy supply problems have benefited American companies that are able to liquify natural gas (LNG) and export it to Europe at higher prices.  However, the LNG infrastructure has limited capacity.  If Russia takes the next step and eliminates energy supplies to Europe, an economic depression for the European economy is inevitable and will have consequences for the American economy and financial system.

What’s the good news?  The market declines of 2008-2009 and 2020 created some great buying opportunities.  We may see a similar opportunity before the year is over.  In the meantime, we have a low allocation to equities, debt with high credit ratings and shorter maturities.  We have a large allocation to precious metals, which did well until mid-April.  I expect more investors to recognize the importance of including precious metals in their investment portfolios in the future.

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA