The S&P 500 corrected 10.5% in the spring and is now back up
to within 3% of its highs since the Great Recession. Clearly,
portfolio managers see lots of value in companies posting record
profits.
In the aggregate, these earnings could total over $102 EPS for
the index this year, giving it a running P/E multiple of about
13.5X. And since next year's estimates are still in the
neighborhood of $110, the index could travel up to 1485 and keep
that attractive forward multiple.
But that's the critical question: Will estimates stay that high
or are they destined to come down?
The current earnings season says "probably not." Here is
Sheraz's summary at the end of last week:
The second quarter earnings season has turned out to be quite
decent -- not strong or good, but better relative to pre-season
expectations
.
With results from 292 S&P 500 companies available at this
stage (as of Friday, July 27th), total earnings are up 5.4% from
the same period last year, though the growth rate turns negative
once Finance gets excluded. In addition to Finance's heavy
contribution to the aggregate growth picture, performance on the
revenue front has been notably weak as well.
While 67.1% of the companies have beat earnings expectations,
the beat ratio on the revenue front is far weaker -- only 36.6%
of the companies have beaten revenue expectations. Even some of
these companies with positive revenue surprises for the second
quarter have guided towards lower revenue numbers in the coming
quarters. This does not bode well for growth in the coming
quarters.
And it is the trend of weaker revenue growth that seems to
confirm the global slowdown data we are getting here and
abroad."But what about all those EPS beats?" say the bulls.
Beyond lean and mean corporate America's ability to squeeze more
bottom line from less top line, the lowered bars can sometimes
sneak past you in real-time.The chart below from Citi shows what
EPS results look like if the estimates were frozen before reporting
began.
So, should the market be chasing those fictional future earnings
of $105 and higher? In other words, is the market fairly valued
around S&P 1400, or should it come down to reality?
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