If you had read my previous post on What Have We Got After 8 Years of Easy Money?, you would know that the US equity market has gone on an 8-year bull run even though many industries (at least those in Singapore) are facing poor business and/or low margins. Fig. 1 below shows the performance of S&P500 index since 2012, which is mostly on a straight upward trendline.

Fig. 1: S&P500 Index Since 2012

Yet, when you look at the earnings of S&P500 companies over the same period, they have been relatively flat. See Fig. 2 below (source: Cash Piles at American Companies Are Shrinking). This is due to the lacklustre global economy since 2012.

Fig. 2: Flat Earnings Since 2012

Thus, on one hand, we have flat earnings, but on the other hand, we have rising share prices that have increased by about 73% since 2012. The main reason is of course the massive liquidity unleashed by 8 years of low interest rates and multiple rounds of Quantitative Easing by central banks around the world.

However, it is not just investors who are taking advantage of the cheap and plentiful liquidity to bid up asset prices. Companies themselves are also taking up loans to fund share buybacks and dividends. See Fig. 3 below (source: U.S. Profit Recession Means Debt Fuels Most Buybacks Since 2001). Notice also the bottom chart of the figure which shows the flat EPS growth since 2012, which is consistent with Fig. 2.

Fig. 3: Debt-Fueled Share Buybacks and EPS Growth

Share buybacks can provide a boost to share prices in the short run, but when earnings are flat and companies have to take up loans to fund these buybacks, they may not be sustainable. In the short run, share prices can be out of sync with earnings. But in the long run, the 2 must converge. This is another reason why I am not optimistic about the investing environment moving forward.

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