David Rosenberg: S&P's Upside is Capped By Falling Earnings (CNBC)

David Rosenberg via CNBC.com
David Rosenberg, chief economist and strategist at Gluskin Sheff, mentioned on CNBC yesterday that he thinks the S&P's "upside is capped because corporate earnings are on the down escalator." Meaning lower EPS is currently trumping QE3's effect on stocks. I put up more interesting quotes from the video below (watch the full interview as well). The quotes are not from an official transcript. Richard Bernstein of Richard Bernstein Advisors, his former colleague at Merrill Lynch, challenged some of his views in the video.

  • "The reality is that even with this latest round of quantitative easing, maybe the most aggressive round, the reality is that the S&P 500 through the interim peaks and valleys actually hit its high on September the 14th, the day after QE3 was announced. And I think a lot of it is because what's capping the market to the upside is the fact that corporate earnings are now on the down escalator. So the Fed and the expansion of the balance sheet and the liquidity probably gives you a much firmer floor in any correction. But the market is telling you right now that the upside is capped because corporate earnings are now on the down escalator."
  • "Looking at the deepening and spreading recession in Europe, the impact that that's having on trade flows in Asia. I think there is going to be a lagged impact on exports here at home. Of course housing is recovering, that's good news, but that's 2% of the economy. And manufacturing ain't what it used to be, but it's still 10% of the economy. So I think that when you add it all up together and we have still profit margins almost at record highs, my sense is that profits are probably going to be coming down somewhat over the next year. I don't think that necessarily means we have a sizable correction in the stock market. But what I think it means is that it's really going to be a stock pickers market. We are going to be range bound...."
  • "Well, I think the one thing that we know is this, we know that the Fed is going to be keeping policy rates at zero at least through mid-2015. We know that Bernanke has already told us that even if the economy reaccelerates on a sustained basis earlier than expected, they have no intention of raising interest rates before that date...... I think what the Fed has done here, they can't really influence directly the earnings cycle. But they can certainly influence the amount of interest rate volatility and secure yield they want to take out of the marketplace. So I still think it's going to be a great environment for dividend growth, dividend yield, dividend coverage, that slice of the stock market I think will still remain intact. And the one thing I do have conviction in is that the state of corporate balance sheets are in excellent shape, that hasn't changed...... So corporate bonds in terms of trying to find securities or assets that will generate equity like returns, without necessarily taking on the inherent capital risk in the equity market, I still think that credit, spread product will continue to be a good place to generate risk adjusted returns for investors."

He made some good points.


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