Weekly Wrap by Pythagoras Investing : Fiscal Cliff

Earnings : Downgrades in 2021 and upgrades in 2022

In 2021 we see earnings in financials downgraded -3%, industrials -7% but in resources +6%.  Earnings in 2022 have recently been upgraded by 15%.  A good sign, but more growth is expected (and needed).

Price earnings is a term explaining the expensiveness of a stock using its price and next years earnings.  It is a rough valuation measure.  Over the last 25 years it has averaged 23x.  In the GFC this rose to 30-32x.  Currently it is 47x.  This is because earnings have fallen and the confidence in recovery means people are willing to pay a higher multiple and wait until the earnings recover. Either way, on this crude measure the market prices look high.  Now we need economies to open and earnings to regrow.

Technology stocks

Following on from our recent correspondence about growth and technology stocks, it is important to compare the Australian tech stocks with the US tech giants eg Facebook, Apple.  Cash flow being generated by the US stocks is very strong due to their market positions. By comparison, almost without exception, the Australian stocks bleed cash flow leading to a need for additional capital over time.  Furthermore the expensiveness of the American stocks is approximately 50-75% of the Australian tech stocks. 

Whilst our Australian stocks are tech stocks in name, the differences couldn’t be more stark!

What is a fiscal cliff ?

We know the government here in Australia has been throwing stimulus money at our economy to keep us all afloat.  The extent of this has been amazing including Jobkeeper, tax relief, cash flow for employers, debt deferrals and super withdrawals.  When you add the stimulus, the dollars are remarkable.  March-June 2020 $75bn+, June-September 2020: $105bn+ and the big drop in October – December 2020 $25bn.  Now I am not sure about you, but I feel a little underwhelmed by this level of support.  I expect we need more in this coming quarter.  With 2 weeks to go, if it is going to change, we should expect some information soon. 

Of course, which generation pays for today’s welfare expenditure and how is the broader question of real significance. 


The sensitivity of the market to vaccine news is huge.  Business is putting more pressure on government to open state borders and return to a new “normal” without a vaccine.  The restrictions on Victorians remain in place – but the rest of Australia appears to be open.