David Stockman explains why the stock and bond market could be on the verge of a collapse.» Read More
If you're looking for value in U.S. stocks, you'd better look hard.
The S&P 500 Index's forward price-to-earnings ratio—the popular metric that measures how much investors are willing to pay for each dollar of expected future earnings—closed the week at 17.1, according to FactSet data. That's more than one-third higher than the P/E of three years ago.
Even with Friday's 1.1 percent drop, then, equities are not exactly at bargain level prices. (Tweet this)
"We're a value-driven shop, so everything we do is driven by the ability to acquire assets, stocks in particular, at a discount to intrinsic value," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. "But there are precious few opportunities like that on the ground."
The S&P 500 is less than 1 percent from its all-time high, and according to one top technician, more records are just around the corner.
"We've already seen new, all-time highs registered by major indices in the U.S. and globally," said BTIG's chief technical analyst, Katie Stockton. "The S&P 500 has yet to do that, but I think it's a matter of time."
Stockton pointed out that despite a negative outlook for earnings, the initial reaction has been quite positive. "We're seeing breakouts [on earnings] on an individual stock level," she said. "The Russell 2000 has hit a new all-time high, and I think the S&P 500 is going to break out from what has become a bit of a triangle formation on the chart."
Are companies beating earnings expectations? Well, yes and no.
All eyes are on earnings this week, as investors eagerly await to find out how well American companies did in the first quarter of 2014. So far, fewer than 20 percent of S&P 500 companies have reported. But already, a few disturbing trends are emerging.
Of the 85 S&P companies that have already reported their first-quarter earnings, 67 percent have beaten analyst estimates on the earnings side, and 51 percent have beaten on the revenue side, according to FactSet. That sounds pretty good—until one considers that over the past four years, 73 percent of companies have tended to beat earnings estimates, and 58 percent have tended to beat revenue estimates.
It's not just the number of companies beating—the aggregate amount of earnings has been similarly light. Companies have reported earnings 2.0 percent above expectations, which is well shy of the 5.8 percent "surprise percentage" that companies have tended to report over the last four years.
The overall sales numbers have also been soft, with companies reporting revenue 0.3 percent below expectations in aggregate.
At this point, S&P 500 companies look to report a year-over-year earnings decline for the first time since the third quarter of 2012. By combining the earnings that have already been reported with the analyst estimates of the S&P 500 earnings we have not yet seen, FactSet senior earnings analyst John Butters arrives at a "blended" earnings decline estimate of 1.3 percent.
Is the economy actually picking up steam? Investors will get another indication this week, when cyclical giants like Caterpillar and Ford report earnings
"I'm looking at CAT, I'm looking at Ford, I'm looking at Microsoft. And I'm taking them all together and kind of putting them in the category of an economic datapoint from a macroeconomic standpoint," said Jim Iuorio of TJM Institutional Services.
He expects that the reports will give investors another reason to be optimistic.
"I think that it's going to be good, based on the fact that most of the numbers we've seen over the last couple of weeks have been pretty good," Iuorio said.
So far, earnings season has brought decent news. 65 percent of the S&P 500 companies that have reported have beaten earning per share estimates — which just slightly below the 71 percent average. On the revenue side, 51 percent of reporting companies have beaten.
Not only is long-term economic stagnation possible, but current conditions in the United States could lead to this nightmare scenario. That's the shocking conclusion presented by Brown University economists Gauti Eggertsson and Neil Mehrotra, whose recent paper, "A Model of Secular Stagnation," explains how secular stagnation could come about.
This flies in the face of the popular theory that long-term economic stagnation is not possible. After all, economic agents are expected to adjust to whatever the current economic conditions are, and once they do, the framework for growth should be laid anew.
But by adjusting economic models to allow for the fact that different groups have different needs, the two economists bring a new truth to light.
"In models in which there is some heterogeneity in borrowing and lending, it remains the case that there is a representative saver whose discount factor pins down a positive steady interest rate. But moving away from a representative saver framework to one in which people transition from being borrowers to becoming savers over time due to lifecycle dynamics will have a major effect on the steady state interest rate and can open up the possibility of a secular stagnation," Eggertsson and Mehrotra write.
Using complex models, the paper goes on to show why a "deleveraging shock," a "drop in population growth," or "an increase in income inequality" could all increase savings. And with a short-term nominal interest rate permanently at zero, the central bank will be "unable to generate a sufficient monetary stimulus because the nominal interest rate cannot be negative." Instead, the result is a "permanent drop in output."
Gold suffered its worst day of the year on Tuesday, as bullion fell 2 percent. And when it comes to where gold is going next, Peter Schiff and Paul Krake have completely opposite perspectives.
Krake, of View from the Peak, has a target on gold of $1,000, roughly $300 below current levels. But Schiff, CEO of Euro Pacific Capital, says gold is heading above $5,000.
Schiff's bullish case is premised on the idea that central bank actions will create inflation, which will lead to much higher gold prices.
"Central banks are creating too much money, there's too much inflation, interest rates are too low, and so I want to store my purchasing power in something that central banks can't print," Schiff said on Tuesday's episode of "Futures Now." "I think we're headed much higher because they are not going to stop the presses. They are going to run them into overdrive."
One obvious problem with this thesis is that the Federal Reserve has been reducing, not increasing, the size of its bond-buying program. But Schiff says that quantitative easing will never end.
"If the Fed continues with their taper and ends QE, we will be back in a recession. The stock market will be in a bear market. The real estate market will be in a bear market. And then what is the Fed going to do to respond to that? The only thing it can do is print more money and restart the presses and do more QE," Schiff said.
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But Krake pointed out that even if Schiff is right, more QE will not necessarily send gold higher.
"Peter, how do justify the following: Last year you had the greatest balance sheet expansion across global central banks in history, yet gold had its worst performance in 30-odd years?" Krake asked.
"Did you ever trade anything? Buy the rumor, sell the fact? Gold rallied for over a decade in anticipation of that," Schiff responded. "We shook out some of the weaker players. Meanwhile, gold is outperforming all other assets in 2014."
That counterargument flabbergasted Krake.
"To make the argument that 'buy the rumor, sell the fact' justifies the greatest move in 30 years versus the greatest balance sheet expansion in central banking history? That is a bit of a lame argument, I'm sorry," Krake said.
Gold prices are having another positive run on Monday, rising 1 percent at the day's highs, which brings the metal $50 above where it traded when April began. But with the situation in Ukraine growing more volatile, and the Fed reiterating its commitment to improving the labor market, the rally in gold could just be getting started.
"Gold should probably have a stronger response to many of the things going on than it is right now. I'm a little confused why it isn't going higher," said Jim Iuorio of TJM Institutional Services. "Everything I read and see should be supportive of gold prices. The situation in Ukraine is getting worse, and the Fed has shown they would rather err to the side of dovish."
In eastern Ukraine, several buildings have been taken over by pro-Russian militants. And a Monday deadline that the Ukrainian government set for the protesters (whom U.S. Ambassador to the United Nations Samantha Power says are professionals involved with the Russian government) to leave the buildings has come and gone.
Recently, Russia has warned that Ukrainian actions against the pro-Russian protesters could lead to a civil war. These tension in eastern Ukraine come after the Russian annexation of the Crimean peninsula.
Geopolitical tensions tend to be good for gold, given the metal's use as a safe-haven asset. But that's not the only catalyst traders are looking at.
Earnings season is ramping up this week, and a lot is on the line. After a terrible few sessions for stocks, investors will look to corporate results to determine whether the economy actually lost steam in the first quarter of the year.
"There's no doubt in my mind that earnings are going to make or break the market this week," said Anthony Grisanti of GRZ Energy.
Companies as varied as Citigroup, Coca-Cola, Johnson & Johnson, IBM, Google, and Chipotle are set to report. And what increases the drama is that analysts are expecting Q1 earnings to drop 1.6 percent year-over-year. If earnings do actually shrink, then this past quarter will mark the first decline in S&P 500 earnings since Q3 2012.
Of course, that might not happen. Over the past three years, 71 percent of S&P 500 companies have beaten earnings estimates, and the average earnings growth rate has come in 3.1 percent above expectations, according to FactSet. If that trend holds this year, then actual earnings growth rate will be 1.8 percent, points out FactSet senior earnings analyst John Butters.
However, despite the low estimates, the start of earnings season has actually been relatively weak. Just 52 percent of the 29 S&P 500 companies that have reported have beaten estimates, according to Thomson Reuters I/B/E/S.
And just as weak economic data was pegged on the weather in the first quarter, companies have blamed harsh weather for weak earnings. Nearly half of the S&P 500 companies that have released results have mentioned a negative impact from weather, FactSet reports.
Marc Faber says the stock market is setting up for a decline more painful than the sudden crash of 1987.
"I think it's very likely that we're seeing, in the next 12 months, an '87-type of crash," Faber said with a devious chuckle on Thursday's episode of "Futures Now." "And I suspect it will be even worse."
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Faber, the editor and publisher of the Gloom, Boom & Doom Report, has recently called for growth stocks to decline. And he says the pain in the Internet and biotech sectors is just getting started.
"I think there are some groups of stocks that are highly vulnerable because they're in cuckoo land in terms of valuations," Faber said. "They have no earnings. They're valued at price-to-sales. And this is not a good metric in the long run."
To be sure, there are prominent investors that disagree with Faber, among them legendary stockpicker Bill Miller, who said this week that conditions for a bad market simply don't exist.
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But it's not just momentum stocks that Faber is wary of. He says that investors are coming to a stark realization.
"I believe that the market is slowly waking up to the fact that the Federal Reserve is a clueless organization," Faber said. "They have no idea what they're doing. And so the confidence level of investors is diminishing, in my view."
After starting off the year at 3 percent, the 10-year Treasury yield has spent the last two months in a tight range between 2.6 percent and 2.8 percent. But Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock, says that yield could rise to 3.5 percent this year once economic data start to improve.
"It's in the next one to two months when we're going to see if this data really accelerates, and that's what's going to break you out of this 2.60, 2.80 range," Rosenberg said on Tuesday's episode of "Futures Now."
At this point, he's predicting that the 10-year yield finishes the year at "three and a quarter," though it could rise as high as "three and a half if we end up even stronger on the year in terms of data growth."
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