Pisani: Thank you, Janet Yellen

Getty Images Federal Reserve Chair Janet Yellen listens during a reception for her on Capitol Hill in Washington.

Getty Images
Federal Reserve Chair Janet Yellen listens during a reception for her on Capitol Hill in Washington.

Thank you, Janet Yellen, for finally taking a side and clearly stating that an interest rate hike seems likely sometime this year.

And thank you for finally clarifying the sudden emphasis that was placed on developments abroad in the last FOMC statement.

Specifically, thank you for this clarification: “The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.”

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Yellen is helping the banks this morning on higher interest rates prospects. This is not only important for banks, it’s important for the S&P 500.

Bank earnings estimates have been under some pressure recently on the inability to realize higher rates.

More importantly, investors are relying on higher bank earnings to balance out the disastrous decline in earnings from energy companies. There are precious few sources of earnings growth right now.

S&P Q3 Sector Earnings (source: Factset)

  • Consumer Discretionary: up 10.0%
  • Financials: up 8.5%
  • Health Care: up 7.4%
  • Tech: down 0.2%
  • Energy: down 65%

So Yellen helping the banks is good news. The bad news is that we still have to face this:

S&P 500 Q3 (Source: Factset)

  • Earnings: -4.5%
  • Revenue: -3.3%
  • Margins: 10.1%
  • P/E: 16x

As I noted yesterday, this is the third straight quarter we have seen negative revenue growth, which hasn’t happened since 2009.

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Margins, by the way, are near record highs—10.1%, just high of the record high of 10.5% last quarter.

Margins at record highs, revenues trending negative.

How do you keep earnings up on that?

More importantly, how do you pay 16 times forward earnings with only 2 percent GDP growth?

It’s getting trickier, and the bulls are getting a bit more defensive.

“Flat is the new up,” one trader quipped to me yesterday.

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