There is nothing much different than yesterday. We continue to get generally solid earnings reports. Although things are looking good now, I am not expecting this to last for too long as expectations are pretty high and earnings growth going forward will be slower. Companies who are beating by huge margin are the only ones getting positive moves.
We will need P/E expansion for this market to move up more significantly. P/E expansion typically happens when investors have fewer concerns about the macro front, basically they feel more comfortable taking risk. In financial jargon, the cost of capital goes down. In the near term, I doubt macro concerns will reduce, so my belief is that we are not going to get any PE expansion at this stage. That is why I don’t expect any significant move higher in the market at this stage. As I had explained in one of my prior posts, the chance of a strong move higher will be later in the year if the economy survives the end of stimulus measures, that will embolden investors that we can keep growing without help and that will cause a P/E expansion.
Here is a summary of the economic news from this morning.
- Unemployment claims remained above 400K. This indicates that the jobs situation is not improving fast. It means we are probably still growing jobs at the slow and steady pace of the last few months
- There was some disappointment in the philly fed index which is regional manufacturing survey by the Philadelphia federal reserve bank. This is not too important yet, as a lot of these economic indicators are pretty volatile.