Today’s Key Takeaway
In order for any stock market to remain in an upward trend, expectations for
earnings must move higher on a sustained basis. Since the beginning of April,
forward-looking earnings for the S&P 500 have risen sequentially on a weekly
basis (as shown in the chart below), and as a result, the index has
appreciated by 23%. But can this trend continue?
Yes, and here’s why….
Typically, when businesses are feeling optimistic about future demand for
their goods and services (and therefore corporate profits resulting from
revenues), they purchase new equipment in order to produce sufficient goods to
meet increased demand. By looking at the amount of new orders for business
equipment, investors can gauge the level of confidence that businesses have in
their future profits.
Today’s durable goods order data showed that the up-trend that began in April
remains intact. To be specific, new orders for goods expected to last more than
3 years rose .8% in September. And if we exclude the volatile transportation
component, durable goods are now up sequentially for the past 5 months.
Most importantly though, total orders have risen 7.9% from last year, yet
shipments of these goods have only risen by 3.3%, which points to continued
growth in manufacturing activity in the months ahead as businesses look to fill
these orders.
As can be seen in the chart below, there is a very strong correlation between
manufacturing activity and corporate profits.
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