Would you call a 5K race over when the runners were on the third kilometer? Probably not.
So keep this in mind when looking how the indexes are performing and how they are likely to close out the end of the year.
So far in 2021, the major market indexes are having a banner year:
- S&P 500 +20.8%
- Nasdaq Composite +19.2%
- Russell 2000 +16.1%
- Dow Jones Industrial Average +15.6%
Here at Real Money, the Real Money Post Industrial Average (RMPIA) is now up 18.2% year-to-date.
Now, while the RMPIA is lagging most the major market indexes, there is reason to think RMPIA will once again best the Dow and the S&P 500 just like it did in 2019 and 2020. Those years, the RMPIA returned 34.4% (in 2020) and 32.4% (in 2019).
But first let's step back and look at what's ahead, before the year closes out. We still have third-quarter earnings season, three Federal Reserve monetary policy meetings, and the holiday shopping season. We'll also have big corporate events, including Apple's (AAPL) expected iPhone 13 unveiling and Microsoft's (MSFT) expected Sept. 22 debut of its latest Surface model. That's what we know so far, but odds are there will be more than few unknowns ahead of us.
Now, look at how the S&P 500, the Dow and the Nasdaq haven't kept up all that well with the evolution of company business models and emerging sectors. For example, there isn't a mobile payments or streaming category to be found in any of them. Even S&P Dow Jones "recently" added the Communications Services sector that is "dedicated to the new communications services sector," and by recent, I mean two years ago. That's why a while back, the brain trust here at Real Money created the Real Money Post Industrial Average.
So, why is there reason to think RMPIA will once again best the Dow and the S&P 500 just like it did in 2019 and 2020? The reason is tied to earnings growth and the typical multiple expansion it brings. Currently the basket of companies that comprise RMPIA are poised to generate aggregate earnings per share growth of 47% over the 2019-2022 period vs. 34% for the S&P 500. For those that are more focused on forward EPS, RMPIA still trumps the S&P 500 with its 37.3% expected growth in EPS over the 2021-2023 period - more than double that for the S&P 500's 17.3% EPS growth over the same period.
Digging into the RMPIA basket further, we see that more than half of the current 27 constituents -- 18 for those looking for a precise figure -- are currently expected to deliver faster EPS growth than the S&P 500 during the 2021-2023 period. Some of those stocks are the usual suspects -- Amazon (AMZN) , Facebook (FB) , Netflix (NFLX) , and PayPal (PYPL) -- but also several that are more tied to the continued reopening of the global economy such as Booking Holdings (BKNG) and Mastercard (MA) . And lest one think there is expected EPS growth across all of the current RMPIA constituents, there are several, including Regeneron (REGN) , Kraft Heinz (KHC) , and Thermo Fisher Scientific (TMO) , that are expected to see their EPS contract over the coming two years. Despite those drags, however, the earnings power to be delivered by RMPIA is rather robust and speaks to the tailwinds and structural changes being addressed by the basket of constituents.
In the coming months, we'll be rolling up our sleeves as we get ready for the upcoming rebalance and reconstitution of RMPIA. In looking at the current basket, there are some areas of that are either underrepresented or not represented at all -- precision farming, plant-based protein, and cybersecurity. I would point out those categories don't exist for S&P Dow Jones, but in keeping with the directive behind RMPIA, we'll want to focus on what is driving the market today and what is poised to drive it in the coming quarters.
While we prepare for that, I'd also not that on a price/earnings-to-growth ration basis, the aggregate 27 companies that make up the RMPIA are trading at 0.45-times vs. 0.5-times for the S&P 500. One can argue, and correctly so, that the faster earnings growth should have RMPIA trading a premium to the S&P 500. At a minimum, if RMPIA's current PEG ratio simply mimicked that of the S&P 500, RMPIA would be up roughly another 10% year-to-date. As I noted above, there are a number of catalyst to be had and as they unfold, the power of RMPIA's earnings growth prospects are likely to bleed through just like they did in 2019 and 2020.
(AMZN, AAPL, MSFT, FB, PYPL, MA are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)