August 2021 Newsletter – Mid-Month Strangely Bullish

Over the last 5 quarters, analysts have significantly underestimated S&P 500 earnings. Some 90% of companies reporting have outperformed quarterly earnings estimates even as a resurgence of pandemic fears are on the minds of many.

Consumer demand is strong. Empty shelves must be restocked. Remaining inventories have pricing power. Raw material providers also benefit from new pricing power. This restocking phase should create some inflation fears for consumers and corporations who are unsure of their capacity to pass on higher materials and labor costs to consumers.

This outlook is strangely bullish. That is, based upon very strong earnings and lower price-to-earnings ratios, due to inflation fears, Credit Suisse analysts lower average S&P 500 price-to-earnings multiples to 20 from 21.4. As the chart below shows, however, the S&P 500 may hit 5,000 by the end of 2022 based upon forward 2023 earnings which could hit $250.

Multiples have been dropping since August of last year. In August of 2020 S&P 500 price-to-earnings multiples stood at some 23.2. Today they are closer to 20.6. See the chart below.

The good news is that estimates of $250 in projected S&P 500 earnings include an accounting of higher corporate taxes for 2022 and 2023. The better news is that some analysts are projecting $300 in S&P 500 earnings by the end of 2025.  If so, a 6,000 S&P 500 index number is not unthinkable during this expansion. So as the recovery is only one year old, it is therefore unlikely to end anytime soon. At this juncture the recovery seems poised to last several more years.

Nevertheless, corrections happen. Buckle up. They happen often. Dips of 5-15% are common for the S&P 500 ETF (SPY) though we haven’t had a correction of greater than 5.65% anytime this year.  Using the actual S&P 500 index we haven’t had a 5% correction all year. So, preparing yourself for an “I- didn’t-see-that-coming” downdraft is emotionally healthy and pragmatic.

Yes, TINA is strong. TINA, you may recall stands for “There Is No Alternative…” to stocks. However, when markets are priced to perfection, as may be the case now, discounting can occur suddenly. These corrections can, in part, come in response to events such as tax hikes, tapering by the Federal Reserve Board, bad news of the pandemic front, corporate pricing power deceleration (due to inflation) and reductions in corporate profit margins. Other than bad new pandemic news, most all of the other reasons listed here may well occur in the next 12 months. Therefore, many analysts are already beginning to establish the case for a sharp deceleration in the Gross Domestic Product growth rate.


Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 920-37

The Leuthold Group
Credit Suisse

Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0265