With the first quarter now over the focus will move to earnings in about two weeks. The current trends in earnings estimates for the S&P 500 continue to show stabilization based on the latest data from Dow Jones S&P. Additionally, GDPNow Forecast for the first quarter has risen sharply for the US over the past few weeks. The PMI readings we get this week from many of the major economies will continue to point to the direction the global economy and whether the outlook is continuing to show contraction or the start of a recovery.
The S&P 500’s current valuation would suggest that investors continue to believe that earnings growth will continue to contract. However, it would seem entirely possible at this point, that if the economy around the globe is at least showing some stabilizing or even mild improvement, there is a good chance that earnings estimates for 2019 have fallen too far, and may eventually need to lift. It would at least suggest that the recent rise in the stock market is likely to continue to continue for some time in 2019.
GDP
The latest economic data out of the US at least suggests some improvement is occurring. The Atlanta Fed’s GDPNow forecast have risen well off its lows of near 0% to around 1.7%.
(Atlanta Fed)
The model although not perfect does do a pretty good job of tracking the quarter and coming within a decent range of the actual GDP results.
PMI’s
The manufacturing PMI’s are one statistic that has caught investors attention because of how sharply they have fallen.
Germany’s PMI has fallen rather sharply, into a region that may even suggest the country saw its GDP contract in the first quarter. One would have to go back to mid-2012 to find readings as low as the current when Europe was having some severe problems with Greece and the sovereign debt issues.
However, the latest data showed that the US has remained firmly in expansion territory but well off its highs.
China reported its manufacturing survey rose in March 50.5 from February’s 49.2. Should the trend of better PMI reading continue throughout the week, it will be taken as very big positive by investors.
Earnings Estimates
Earnings estimates for 2019 dropped slightly this week to $165.34 from $165.50 last week, while 2020 estimates fell to $186.36 from $186.40. Overall, it keeps earnings growth fairly strong at 9% in 2019 and 12.7% in 2020.
(Data provided by Dow Jones S&P)
According to the current estimates earnings growth is expected to trough in the first quarter and begin to recover.
(Data provided by Dow Jones S&P)
The S&P 500 is currently trading at 15.2 times 2020 earnings estimates. I have made a slight change to the average since 1988 by using the end of year results, as opposed the to next twelve months. It resulted in the average falling by roughly 0.4 to 17.4.
Regardless, the S&P 500 is still trading well below the historical trends. Which again continue to suggest that the market expects further deterioration in earnings due to a weaker global economy. However, should data this week show that the global economy is not getting worse or showing signs of stabilization then perhaps that would suggest that stock prices still have much further to rise.