“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!
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.
IMPORTANT INFORMATION: This material is for information purposes only. The views expressed are those of the author(s) as of the date noted and not necessarily of the Firm and are subject to change based on market or other conditions without notice. The information should not be construed as investment advice or a recommendation to buy or sell any security or investment product. It does not take into account an investor's particular objectives, risk tolerance, tax status, investment horizon, or other potential limitations. All material has been obtained from sources believed to be reliable, but the accuracy cannot be guaranteed. We do not seek to endorse any investment products or financial services described herein. Any information about a product or service should be confirmed with its sponsor. Any remote links herein are provided only for your convenience and Braver Capital has no interest in, responsibility for, or control of the information on the linked website. We make no promises or warranties, expressed nor implied, including the accuracy of and fitness for a particular purpose of the content on any linked website. In no way will Braver Capital be liable for any damages resulting from use of these links under any circumstances.