Investors May Be Worried Over A Scenario That Simply Does Not Exist

This week’s latest data is out from Dow Jones S&P; it 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%.

eps growth rates

(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.

pe ratios

(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.

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Disclaimer: This article is my opinion and expresses my views. Those views can change at a moment's notice when the market changes. I am not right all the time and I do not expect to be. I ...

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