There is a rising trend — especially in the telecommunications, utilities, and REITs sectors — of selling off non-core assets and using the proceeds to reduce debt. Rising long-term interest rates are likely to accelerate this trend.
Debt reduction reduces funds available for stock buybacks. This chart from S&P Dow Jones Indices shows buybacks on the S&P 500 have been declining since Q2 of last year.
Without buybacks, S&P 500 earnings growth is expected to follow declining year-on-year sales growth, removing the justification for high earnings multiples.
Price-earnings multiple for the S&P 500 is expected to decline towards its 50-year average of 16.4.
Conclusion
Debt reduction is likely to accelerate the decline of stock buybacks, eroding support for elevated price-earnings multiples.
Declining sales growth is likely to reduce earnings growth and further erode the justification for high earnings multiples.
The price-earnings multiple for the S&P 500 is expected to decline towards its 50-year average of 16.4 (based on highest trailing earnings).
Acknowledgements
- Eric Cinnamond at Palm Valley Capital
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.