Eroding Dividends and Failing QE3

The future has begun to change for the U.S. stock market. After mostly flatlining since the end of 2012-Q1's earning season, expectations for the amount of dividends expected to be paid in the future began to decline in mid-October 2012 as the outlook for dividends has worsened.

Meanwhile, when it comes to stock prices, investors appear to be focused on the very near term, with the change in the expected growth rate of trailing year dividends per share for the fourth quarter of 2012 setting the pace for the change in the year-over-year growth rate of stock prices for both October and November.

Until mid-October 2012, investors had appeared to be setting stock prices largely in tune with the change in the expected growth rate of dividends for the first quarter of 2013, the outlook for which is mildly positive. By contrast, the outlook for 2012-Q4 is moderately negative as it indicates that the growth rate of dividends is decelerating.

It also appears that the Fed's latest exercise in quantitative easing is failing to produce the same equity lifting effect it had in its previous two incarnations. Previously, we had observed that while the Fed was running its QE programs, the change in the growth rate of stock prices was well elevated above the expected change in the growth rate of future dividends per share.