Companies are relying on financial engineering to achieve earnings growth in the face of average economic gains in the United States, S&P Investment Advisory Services President Mike Thompson said Monday.
“A lot of what you see in terms of the earnings growth you have right now is engineering,” like stock buybacks and global labor arbitrage, he said. told CNBC’s “Squawk Box.”
“These are the levers that companies need to work with. They take advantage of the fact that there are many opportunities to continue to generate their income.”
Company reports are expected to show a 6.9% drop earnings per share for the first three months of the year, according to Thomson Reuters I/B/E/S data. Earnings per share for companies listed on the S&P 500 fell 2.9% in the last quarter of 2015.
In this environment, it’s not earnings, but “a truly horrendous 10-year US Treasury yield” that is driving stock prices higher, Thompson said. Investors don’t necessarily reward companies for designing their path to earnings growth, he added. They simply have few other opportunities for return.
“There is a demographic problem here,” he said. “You’ve got one of the biggest and richest – for sure – generations in human history, being the baby boomers, all to a point where they have to put money into something. .”
“Indeed, it’s very rational to buy stocks. It sounds crazy. You say, ‘Wow, there’s no earnings growth,'” he said.
Valuation has been the only pillar supporting the stock market as earnings growth turned negative and liquidity conditions seized up, said Jurrien Timmer, director of global macroeconomics at Fidelity Investments.
Markets are enjoying a reprieve from tightening liquidity following the Fed’s indication that policymakers will only raise rates twice this year, he told CNBC’s “Squawk on the Street” on Monday. . The Fed previously announced four rate hikes in 2016.
Ahead of the review, expectations of higher U.S. interest rates as Europe and Japan eased pushed the dollar higher, he said. That put pressure on the Chinese yuan, causing currency drawdowns, which creates a form of tightening, he said.
The dollar has since eased, but Timmer warned that liquidity could tighten again as U.S. and foreign monetary policy still fundamentally diverges.
As for earnings, the worst of the declines could be over, as long as oil prices continue to rise and the dollar doesn’t strengthen significantly, he said.
“For me, the question is whether non-energy earnings growth actually turns negative, which hasn’t happened so far, … or is it just a moderation in earnings growth? which is more benign, as we’ve seen in others kind of mid cycle down cycles,” he said.