It’s been quite a comeback. No, not Croatia in the World Cup game against Canada (although that was something, too). U.S. stocks have mounted a big turnaround amid expectations the Fed’s hiking pace could slow as soon as December. The S&P 500 is down 16% this year, but up 13% from Oct. 12, its lowest close this year. Investors think the “macro” looks more favourable for stocks. Can earnings mess up the rosy outlook?
Recent optimism in the markets could soon evaporate as corporate profits get squeezed further. The issue is the E in the P/E. Investors use the ratio of a company’s share price to its earnings as a shorthand for whether a stock appears cheap or pricey.
The P has been declining hard this year but E hasn't, at all. If the earnings side of the equation pulls back, that could make the market look overpriced.
FactSet data suggests that with 97% of them reporting so far, companies in the S&P 500 are on track to post 2%ish year-over-year profit growth for the third quarter. Earnings growth has slowed down significantly and - for the first time in a long time - analysts are now actually looking for an outright decline in Q4. To put this in perspective: Wall Street was expecting 9% earnings growth for this same batch as recently as this summer.
S&P 500 is trading at more than 17 times their projected earnings over the next 12 months. Sure, that’s down from 21 in January already but up from around 15 at the lows this year. It’s also still slightly ahead of its 10-year average.
Earnings decline isn’t by itself an issue. There is plenty of evidence of stocks rising while earnings are declining, but the starting valuation point is unusually high. That could present a headwind for the bulls as they hang their hat on a less hawkish Fed.
Idea Spotlight: Tesla (TSLA)
TOGGLE analyzed 33 similar occasions in the past where entry point indicators for TSLA:NASD were oversold and historically, this led to a median increase in price. This insight received 7 out of 8 stars in our quality assessment.
This past weekend, Tesla announced that its self-driving Beta software is now available to anyone in North America!
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