This week’s latest data is out from Dow Jones and S&P shows that earnings, at least for this week, have stabilized, falling only slightly versus last week. Forecasts for 2018 now stand at $151.55 versus $151.60 last week. The earnings for 2019 have dropped to $166.00 from $166.06, while 2020 have fallen to $187.33 from $187.40.
(Dow Jones S&P)
Given all the revisions, growth rates have changed fairly materially over the past few weeks. Growth in 2019 is now forecast to rise by about 9.5%, up from prior estimates of around 7.6%. Meanwhile, 2020 earnings growth is forecast to increase by 12.85%, down from 13.25%.
(Data from Dow Jones S&P)
The PE ratio for 2019 dropped this week to 16.5, while the 2020 PE ratio dropped to 14.64.
(Data from Dow Jones S&P)
Better Growth, Low Multiple
What I find most interesting about the current market environment is that investors appear to be paying a below average price for what is expected to be above average earnings growth.
Since 1988 the S&P 500 has averaged a trailing-twelve-month PE ratio of 20.3, a current P/E ratio of 18.8, and next-twelve-month PE ratio of 17.7. Currently, the S&P 500, we find that the TTM PE ratio is 20.7, the current PE ratio of 18, the NTM PE ratio is 14.6. What we learn through this example, is that S&P 500 from a current PE and TTM PE ratio is fairly valued, but is well below the historical on a forward basis.
(Data from Dow Jones S&P)
But as the previous quarters continue to roll-off, the TTM PE will drop, and those multiples are likely to fall below the averages.
Also, for the S&P 500 to trade at its historical NTM PE ratio of 17.7, earnings estimates would need to fall about 17.3% to $154.90. That would wipe out all the earnings gains from 2019. Doesn’t seem likely at this point.
Additionally, earnings growth, despite being revised lower, are still growing at a faster pace than the historical of 8.1%, not including 2019 and 2020 estimates.
(Data from Dow Jones S&P)
Worry, Worry
So why is the market trading below these norms? Because of the fear that investors have about the US and the global economy. But GDP results for the fourth quarter were stronger than expected and the {{ecl-176||services ISM}} came in much higher than expectations and historically near its highest levels. Even the manufacturing ISM is still strong at over 54.
Meanwhile, the jobs report on February non-farm headline number was a disappointment. The numbers that do matter such as the unemployment rate continue to show some encouraging trend. The most significant trend is the number of people re-entering the workforce. That number peaked at 96.2 million Americans in August and September 2018 and has fallen 95.2 million.
Meanwhile, nearly everyone that wanted to find a job during the month, found one, with the number of unemployed falling by 300,000 and the number of employed rising by 255,000.
(BLS.gov)
For all the negative warnings signs floating around out there, I can point to plenty of positive signs floating around.
If earings are at the very least beginning to bottom, then it fair to say at current levels the market is fairly valued, while trading at a discount on future earnings. Additionally, it may entirely be the case that many investors are currently worried about a scenario that may not simply exist.
Of course, this all hinges on the fact that my outlook for the economy is not nearly as dire as many. Has growth slowed? Absolutely, it has stalled. Is growth turning into a contraction? At this point it hard to say that is the case.