Whitney Tilson Supports My EPS/Stock Price Thesis
An excerpt from Whitney Tilson’s “Huge earnings growth doesn’t mean a huge rise in stocks“:
My friend Doug Kass of Seabreeze Partners Management agrees that strong earnings per share (“EPS”) doesn’t equate to strong price gains. In a recent missive (subscription required), he notes:
First-level thinking is lazy, simplistic and superficial – it looks for simple formulas and easy answers. To paraphrase Howard Marks:
- First-level thinking says, “S&P EPS growth will be strong, let’s buy the market.”
- Second-level thinking says, “S&P EPS growth will be strong, but everyone knows it. Stocks are fairly or overpriced, let’s sell the market.”
Most recent examples of when S&P EPS was better than expected and strong were in 2018 (+20.5% EPS growth, -6.6% decline in the S&P), 2006 (+16.7% EPS growth, +11.3% rise in the S&P), 2005 (+19.3% EPS growth, +8.8% rise in the S&P) and 2004 (+20.1% EPS growth, +4.2% rise in the S&P).
Going back, during the last 50 years, other 12-month periods with robust EPS growth and less-than-stellar to down S&P price include the years 1993, 1992, 1987, 1984, 1979, and others.
He argues that this year offers a combination of unique market challenges compared with prior periods:
- High and rising inflation and interest rates.
- A burgeoning deficit and U.S. debt load may be a permanent condition giving the general lack of discipline from both parties in Washington DC.
- Improvisational geopolitical and fiscal policies that present threats to political and economic stability.
- Both parties are moving to extremes – the Republican party more to the right and the Democratic party to the left. With a possible Democratic congressional majority win in November, anti-corporate policy (higher corporate taxes, etc.) may be in the offing.
- Traditional valuation metrics in the 98th percentile, two standard deviations above the average.
- The AI capital spending spree and gains from investments have inflated S&P profit reports… an earnings reckoning may lie in the not too distant future.
I think Doug is right that huge corporate earnings growth likely won’t translate into a comparable huge rise in stocks.
Unlike Doug, I’m not bearish on stocks in general – with the exception of the AI bubble. When it bursts, stocks that have soared during this boom – such as CoreWeave (CRWV), which I analyzed on Monday – will undoubtedly crash.
Position: None
