The Weakest Link in Today's Market

Expending more than you take in works for a diet, but it doesn’t for the stock market.

That’s the upshot of a recent Wall Street Journal article by Steven Russolillo, who writes that today’s ultra-low interest rate market is allowing share prices to “stay higher for longer than under more normal circumstances.” What could “end this game” he argues, is the amount of cash companies are paying out to investors–which is now exceeding the earnings taken in.

Russolillo quotes New York University finance professor Aswath Damodaran, who believes this to be a significant risk. Damodaran says that “S&P 500 companies through the first two quarters of the year collectively returned 112% of their earnings through buybacks and dividends.” This, he says, is the highest level since 2008 and is the “weakest link in the market.”

Damodaran contends that rock-bottom rates distort traditional valuation metrics and that the “inability of companies to keep paying off their investors will cause the next downturn.” Russolillo adds that lackluster earnings growth projections will make dividend payments and stock repurchases even more difficult for businesses.

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