Normally my weekly earnings missive doesn’t start with a chart, but with the S&P 500 sitting on its 200-day moving average, and many big banks and financials slated to start the Q1 ’18 earnings releases for the S&P 500, will earnings put a floor under the stock market this coming week?
The February 9th, 2018 low for the S&P 500 is 2,532 – that’s still a good flush lower for the key benchmark.
That being said, isn’t it ironic and so like the market to see its biggest correction in the last 24 months, alongside or coincident with the largest upward revisions over a 90 day period in S&P 500 earnings estimates, maybe ever ?
From the last Friday in December ’17 to the last Friday in March, 2018, the S&P 500 “forward 4-quarter estimate” rose from $143.34 to $158.14, or from an expected y/y growth rate from 11.5% to 20.74%.
Here were two headlines from Friday, from both Factset and Thomson:
- Factset: “Record Number of S&P 500 Companies issuing Positive EPS Guidance for Q1, Led By Tech” John Butters
- Thomson: ” Earnings Roundup: S&P 500 Set to Post the Strongest YoY Earnings in 7 Years”
The problem is, we have known this now since December 22nd, when the President signed the tax reform bill, and the forward estimates began rising almost immediately.
Here is the weekly Thomson Reuters data updated as of Friday, 4/6/18:
- Fwd 4-qtr est: $151.92 vs last week’s $158.14
- P.E ratio: 16(x)
- PEG ratio: 0.81x
- S&P 500 earnings yield: 6.22%
- Year-over-year growth of forward estimate: 19.82% vs last week’s 20.74%
Conclusion: My own opinion – and its just an opinion – is that this stock market pullback has little to do with anything but a LONG overdue correction. The last time there was real fear in the market was the first quarter of 2016, as crude fell to $28.50 and credit spreads blew out. If credit spreads remain well bid, that will likely tell you as much about tariffs as any market indicator.
To answer the headline question, “Will Q1 ’18 S&P 500 earnings put a floor under stocks ?” the answer is “the earnings increase is already well-telegraphed”.
That’s not an answer but I subscribe to the Bespoke school of quarterly earnings forecasting, i.e. “the more bearish coming into earnings season, the better”. One headline I read Friday was for the “blockbuster earnings season” to start next week. Didn't like to read that.
While bearish sentiment and market pessimism grow, Q1 ’18 earnings may NOT be the panacea or saving catalyst that many expect. Large-cap, Growth, Tech and Momentum might all struggle in 2018 given the 2017 out-performance.
Client’s Financial sector weighting has been lifted this year. The sector remains reasonably valued and can benefit from easier regulation and capital returns.
Again, these are opinions, not predictions, and any changes can happen quickly if the market dictates.