Stocks Are Undervalued And May Have Even Further To Rise

Stocks Are Undervalued and May Have Even Further To Rise


Stocks have seen a significant rebound since the Christmas Eve disaster. The S&P 500 has risen almost 14% and is now down about 9% from its highs. Unlike the stock market, forecasts for 2019 earnings estimates continue to drop. As of January 17, data from Dow Jones S&P Indices estimate that earnings will climb to $169.61 per share in 2019 up 8.1% from 2018 estimates of $156.89.

(Data From Dow Jones S&P Indices)

Trending Lower

Estimates for 2019 have been steadily falling since August when they peaked at $177.07, falling 4.2% since then. The trend of lower earnings growth in 2019 is something that is likely to continue for some time, but the big unknown is just how far they could fall. It is still early in the first quarter earnings season, but with 10.5% of companies in the index reporting, 73.5% have beaten estimates while 19% have missed estimates, and 7.5% met.If the trend continues, it will result in the lowest beat rate since the second quarter of 2017, and the highest missed rate since the third quarter of 2017.

Energy Is The Big Problem

A significant reason estimates in the S&P 500 are falling is due to the fall in oil prices. Factset data shows that earnings estimates for the energy sector for the first half of 2019 have fallen 30%.The second biggest reduction in earnings estimates have been the technology sector at 7.2%

energy sector


It is entirely possible that throughout the next several week’s oil price continue to recover, and that would help to stabilize the earnings outlook for the sector and the broader equity market. Should oil prices stabilize or continue to rise it is likely to be positive for the equity market.

It also isn’t entirely clear how much estimates for 2020 need to come or if they do need to fall. Estimates would suggest earnings growth of nearly 14% versus 2019 estimates. A healthy growth rate, which would indicate the current PE ratio of 13.8 is less than the 2020 earnings growth rate.

1 2
View single page >> |

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

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.