What's On Tap..

 

“Ignore the Noise and Focus on Earnings”

There are a great deal of negative headlines in the marketplace.  Think about all of the issues currently facing investors: Brexit, Trump, domestic terrorism, Fed, China, slowing job growth, negative interest rates, global growth worries, European bank solvency, and so on.  While the drama that these headlines create might be good for CNBC ratings, it has weighed on investor sentiment.  The AAII monthly average of bullish investors is currently sitting at a ten year low!

Source: FactSet

Source: FactSet

Our opinion is that investors should maintain their focus on corporate earnings as this is the primary driver of stock prices over the long term.  As the chart below shows, the price level of the S&P 500 has been highly correlated with the forward estimates for S&P 500 earnings.  Over the last two years, earnings and prices have been relatively flat.  However, price volatility has been on the rise!

The market is referred to as a “discounting mechanism” as investors always look ahead and discount into the current price what is likely to happen.  As we move into the summer months, investors will begin to shift their focus from calendar 2016 earnings to calendar 2017 earnings.  As is typically the case, the estimates for 2017 earnings are quite rosy!  The chart below shows the growth estimates for the S&P 500 and its sectors for calendar 2017 earnings.  It is expected to be 13.8% in 2017 up slightly from the estimates at the end of March.

At first glance this paints a very favorable picture for the corporate landscape, but I suggest caution in taking these estimates as certain.  According to JP Morgan’s equity strategy team, over the last ten years the consensus growth estimates for the following year were revised down 5%.  Given that there has been no earnings growth over the past two years, a 13% pop in 2017 is an aggressive estimate.  As pointed out by JP Morgan, we expect the trends to continue and these estimates to slowly come down, but still expect earnings growth in 2017.  Positive earnings growth is likely to lead to positive stock returns for investors.  Given the negative sentiment, any sign of positive growth would likely lead to a relief rally for stocks.

 
         Charlie Toole, CFA, CFP      Vice-President, Portfolio Manager

         Charlie Toole, CFA, CFP

     Vice-President, Portfolio Manager

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