E Buffett Makes It Clear

Why would Buffett invest in a highly cyclical industry when the economic expansion is already into its ninth year – the third longest on record?

The most likely answer is that Buffet has faith in the current economic expansion and does not expect a cyclical downturn anytime soon.

Buffett has also been taking sizable positions in other stocks as well, including technology giant Apple where Buffett recently disclosed a quadrupling of his position.

With the current bull market already 96-months old and the second longest in history, Buffett’s investments can be seen as a statement of his positive stock market outlook. It is well understood that Buffett’s investments have the benefit of time on their side, as they are long-term in nature and are held over multiple years. But no one likes to invest at the top, not even a deep-pocketed investor like Warren Buffett!

Buffett’s confidence may not be misplaced.

Earnings, Economy and Monetary policy are all aligned favorably for stock market valuations, as we had discussed in greater detail in The Stock Market Is Heading Higher.

With 498 (98%) of the S&P 500 companies reporting their fourth-quarter earnings as of last week, the average growth rate has come in at 4.9%, higher than the 4.6% reported for the prior quarter, as per Factset. This is the first time since Q1:2015, that the market has witnessed two consecutive quarters of earnings growth. Presently, the forward Price-Earnings (P/E) ratio for S&P 500 index is 17.9x. This is higher than the 5-year and 10-year averages of 15x and 14x, respectively. In an upbeat market with a growing risk appetite, the ratio tends to move faster than earnings as it anticipates improving growth. The P/E of 18x is higher than normal, but wouldn’t be called euphoric, which tends to presage market turning points.