Buttonwood: Margin for error

THIS time is different. It is one of the oldest mottos in the financial markets. When Japanese shares traded at intimidating multiples of profits in the late 1980s, sceptics were told that Western valuation methods simply did not apply to Tokyo stocks. During the dotcom bubble, bulls laughed at those who worried about the absence of profits, let alone dividends, at some of the hottest technology companies. The new “key metrics”, believers explained, were price-per-user or price-per-click.Investors were relieved of their optimism and their cash on both of those occasions. But the old canard is being trotted out again. American profits are at a post-war high as a proportion of GDP (see chart). Given the cyclical nature of profits, a bit of caution about future growth might be in order. But analysts are forecasting that companies in the S&P 500 will achieve a further 10.9% growth in earnings per share in 2014.There is an element of charade about this forecast. Analysts often start the year in optimistic mode and then revise down their numbers as they get guidance from the companies they cover. Take the third-quarter results season, which is now…

Link to article: www.economist.com/news/finance-and-economics/21588901-american-corporate-profits-seem-have-defied-gravity-margin-error?fsrc=rss|fec

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