Correction
is probably around the corner...
Benjamin Graham wrote a book called The Intelligent Investor which Warren Buffet made popular for the practice known as Value Investing.
The book was first written in 1949 and updated versions were published till 1965. The thing that few realise is that the strategies that Benjamin suggested changed with every re-publication. He moved from PE ratios to PB ratios. The thresholds that he considered kept changing.
The market is a living thing and how it works keeps changing. And following his theories from 1965 would prove useless today.
The way companies got valued changed phenomenally over the decades. The financial instruments that are available and how financial engineering takes place have evolved a great deal. Think about it - when Benjamin Graham published his tome, nothing called an Index Fund existed.
Despite all of these factors, there are some things that do not change. A rising market requires rising earnings. That is a fundamental truth that you cannot run from.
The ability to grow earnings was already at a peak in 2020 but the change in spending habits caused by the lockdowns helped many businesses. Businesses such as theatres and food chains rode out that period based on the underlying assets. Price to book ratio rather than the price to earnings ratio.
After the 2020-fueled greed fest, people are all tightening their wallets. Many pre-pandemic expenses such as going out to eat, travel and vacation are back on the table. Companies that benefited from the excess savings are watching those cash flows disappear.
In line with that corporate earnings are hitting a plateau or even falling.
Apple’s fiscal second-quarter earnings were slightly higher than Wall Street expectations but showed overall revenue down 4%, and iPhone sales falling 10%. Source
Walmart's revenue for the twelve months ending April 30, 2024, was $657.332B, a 5.68% increase year-over-year. Source
ExxonMobil has reported net income of $8.22bn for Q1 2024, down 28% from $11.43bn recorded in the corresponding quarter of 2023. Source
Yum! Brands’ revenue for the twelve months ending March 31, 2024, was $7.029B, a 1.28% increase year-over-year. Source
Layoffs were the last vestige of manipulation left to make the earnings look good. They have been used and abused and disposed of. With all the financial engineering done and finished, companies will have to face the music.
A correction will probably arrive sooner than later. It will also force everyone to think about what the next decade will look like. What should be our priorities? What kind of businesses can serve those priorities?