Opinion

US sharemarket rally unsupported by company earnings

Philip BakerAssociate Editor

Updated Apr 13, 2015 – 3.22pm, first published at 10.33am

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When companies themselves are the biggest buyers of shares on the S&P 500 and the amount of cash returned to investors through buybacks and dividends reaches almost $US2 trillion ($2.6 trillion) in two years, it's not unreasonable to start thinking the whole strategy is getting out of hand.

According to S&P Dow Jones Indices, shareholders in some of the largest US companies were given $US903 billion in 2014, split between $US350 billion in dividends and $US553 billion in buybacks, and in 2015 it is expected to be a record $US1 trillion.

Since 2011, dividends in the US have grown 14 per cent each year. If that rate is just maintained this year then investors can expect to get almost $US400 million.

The S&P 500 has gained about 168 per cent over the past six years when dividends are included. AP

Rather than following a strategy of growth, they will return the money, as worries about the outlook for the global economy keep them from doing anything else.

The increase in this year's numbers is being driven in part by the $US90 billion that will be returned by General Electric over the next three years, but Apple is also tipped to increase its current scheme of $US130 billion by as much as $US65 billion.

The S&P 500 has now gained about 168 per cent over the past six years when dividends are included, compared to a 102 per cent gain in the local S&P/ASX 200 accumulation index.

The focus on dividends and buybacks will once again take centre stage in the current US reporting season as the bears worry that stocks on Wall Street can't keep rallying for a seventh year without some material increase in earnings.

And thanks to the US dollar and oil prices, investors aren't expecting that any time soon. Indeed, this might be the worst reporting season since the global financial crisis.

Fall expected

Investors are bracing for a fall in earnings of almost 5 per cent compared to a year ago, when companies have finished reporting their latest quarterly numbers.

The bulls are no doubt hoping it won't be that bad. An increase in the US dollar has been a big driver in the latest round of downgrades as close to 25 per cent of US earnings comes from offshore activities.

Take away the energy sector that has been hit by the slump in oil prices and there should be a 3.4 per cent increase in earnings.

That might look respectable but when analysts were asked for their forecasts at the end of last year they thought earnings would rise by almost 9 per cent. That's some downward revision.

Earnings are on track to post their largest decline since the worst period of the financial crisis, when stocks hit a multi-year low in the first quarter of 2009, according to FactSet.

Financials probably have the most optimistic outlook among all the sectors, with analysts tipping first-quarter earnings this calender year to rise close to 11 per cent from a year ago.

The big US banks begin reporting their quarterly earnings on Tuesday, starting with JPMorgan Chase & Co and Wells Fargo.

Philip Baker writes on markets specialising in bonds, equity markets and currencies. Based in our Sydney newsroom, Phil is a markets columnist. Connect with Philip on Twitter. Email Philip at pbaker@fairfaxmedia.com.au