Q1 2019 EPS Growth Expected To Be 5.02%

Q1 2019 EPS Growth - The Cyclicals Are Cheap Relative To The S&P 500

The chart below is shocking because the forward PE of cyclicals versus the forward PE of the S&P 500 is much lower than it has been since 1980. There are a few takeaways from this metric.

The most obvious one is cheap cyclicals mean investors are anticipating a terrible economy. Panic in late 2018 probably went too far. At a certain point, even if a recession occurs, stocks can still be a buy.

You can’t just focus on the timing of the potential recession without looking at valuations.

Another key point is cyclicals are a buy when they are expensive and a sell when they are cheap because the PE multiple is low at peak earnings and high at trough earnings.

To be clear, forward estimates are heightened at the top of the cycle and suppressed during recessions. However, those forward estimates are incorrect. They only represent analysts’ sentiment.

The final key point is the forward S&P 500 multiple contracted sharply in 2018 because earnings growth was so strong. Cyclicals being cheaper than the S&P 500 makes them very cheap.

Everyone has an opinion on forward earnings projections. They have come down sharply which reflects the negative macroeconomic sentiment and some of the weak earnings reports from Q4.

This is either a low bar which is easy to surpass, or an indication of a weakening economy. It might be both. The economy may be slowing, but estimates might still be beat.

Q1 2019 EPS Growth - Estimates Have Fallen Sharply

The rate of change of earnings estimates gives us a good idea where stocks are going in the near term. Because of the recent volatility in stocks, it’s no surprise estimates for the next few quarters are falling.

Q4 2018 will still have double digit earnings growth since estimates will likely be beat. However, the key point this earnings season will be guidance as it always is.

As of January 7th, 67% of the 18 firms that reported earnings had their Q1 estimates cut. The average decline is 5.29% which is terrible. Last quarter, 59% of firms had their estimates cut with a decline of only 0.35%.

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