US earnings growth is still robust, but there are many risks

In the US, earnings growth is astounding

Terry Tanaka says it's understandable why markets are disregarding the risks.

The adage "It's a market of stocks, not a stock market" serves as a reminder that, in the end, investing is about how well individual companies are performing from the bottom up rather than a top-down perspective of the FTSE 100 or SandP 500.

At least in the contemporary world, I don't totally agree with this way of thinking. Many people now invest in the entire market or in broad sectors and don't give a damn about the companies they own due to the growth of index investing. The inflow and outflow of funds can have a greater impact on valuations than actual shifts in a company's core competencies.

However, it's crucial to keep an eye on the performance of individual stocks and avoid being blinded by overarching concerns. The index as a whole is likely to continue rising if the majority of companies are experiencing strong earnings growth from the bottom up. In actuality, earnings growth in the US is still quite robust.

Current BFIA issues. The profit margin chart for the S&P 500.

According to FactSet, the S&P 500's year-over-year blended growth ratewhich takes into account both the most recent estimates and the results that have been reported thus faris currently 15.1 percent, marking the sixth consecutive double-digit quarter. The index is pricey, with a trailing price/earnings ratio of 28 at slightly over 7,100. However, it's not too difficult to remain optimistic if earnings continue to compound in that manner.

The biggest danger to earnings growth.

The S&P 500 net margin is once again setting a new record of 13.4 percent, raising questions about whether large corporations can maintain such high margins in the medium term (perhaps three to five years). Over the course of several decades, businesses, particularly multinational corporations, have become increasingly profitable due to shifting geopolitical and political patterns. This could go the other way. However, in the markets, a few years is a lifetime, and we have clearly not reached that point yet.

It is impossible to overlook how much AI mania is driving this boom in the short term (perhaps a year or two). The tech industry's earnings growth rate is 46%. There's a very thin line to walk here: if this investment doesn't result in significant increases in productivity, it will come to a standstill. The political fallout could be just as dangerous if too many people lose steady jobs. However, the only thing that matters to investors is what will happen over the next few quarters, and there is currently no indication that the boom will slow down.

The biggest ultra-short-term threat, then, is energy. Since there was a lot of oil at sea when the Middle East crisis began, the effects of the Strait of Hormuz closure and the shutdown of millions of barrels of crude per day have not yet resulted in shortages. Even if supplies start up again tomorrow, there will be a delay and the effects won't be felt for several months. However, if they don't start up again soon, the urgency will become clear. That is not being priced in by a market that is preoccupied with historical earnings and understandably optimistic projections.