Did you know that stimulus measures in large economies like China can temporarily boost stock markets but often fall short in the long term?

Short-term government interventions may not be enough to sustain long-term market growth—investors should keep an eye on fundamentals.

Here’s what we have in today’s edition:

• Too Much Investor Enthusiasm Toward China: First, stimulus measures in China initially excited investors, but recent market declines suggest caution is needed 📉

• Earnings Season Is Here—Why Decent Numbers Won’t Supercharge Stocks: Next, while third-quarter earnings are expected to beat estimates, don’t expect a major market rally 🤷

• Price-To-Earnings Multiples Are On The Rich Side: Finally, the S&P 500’s current P/E ratio suggests that even with resilient corporate earnings, stock valuations leave little room for error 💸

Stay informed, stay ahead, stay investing. Here we go!

Too Much Investor Enthusiasm Toward China 📉

A few weeks ago, China announced stimulus measures to jump start its economy and lift it out of its malaise.

Hedge Fund money has poured into China ever since.

But in recent days, it appears that the government spending measures announced by the government are falling short of expectations.

The Hong Kong market, which is the mechanism through which investors play China, tumbled by over 9% on Tuesday.

There may be more declines ahead for China 😨

Earnings Season Is Here—Why Decent Numbers Won’t Supercharge Stocks 🤷

Companies’ third-quarter earnings will be just fine.

But they’re unlikely to spark a major market rally.

Analysts expect third-quarter earnings per share for the S&P 500 to rise 4.1% year-over-year to just over $60, according to FactSet.

That would come on sales growth of 4.7%.

While these are not gangbuster numbers, the good news is that companies are likely to surpass estimates 📈

That’s standard; for the period just after the financial crisis to the pandemic, companies beat quarterly earnings projections by a few percentages on average.

The second quarter of 2021 saw the index beat earnings estimates by more than 20% because the economy recovered rapidly from 2020, and analysts were conservative with forecasts.

After that, Wall Street got a handle on where the economy—and corporate profitability—were, so companies quickly returned to beating estimates by just a few percent.

That type of modest beat probably won’t move stocks much higher ❌

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Price-To-Earnings Multiples Are On The Rich Side 💸

The current P/E ratio on the S&P 500 is about 21.

Expected earnings per share for the S&P 500 for the upcoming four quarters is about $265.

If that number rises by, say, 3%, the expectation would rise to $272 💰

The index would therefore still trade at a lofty 21 times earnings.

Strong GDP growth and lower inflation support the thesis that corporate earnings will be resilient.

However, what has changed is valuations.

There is less room, in aggregate, for fundamental missteps 😬

American companies are doing well, just not well enough to push their stocks higher right now.

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