Since the volatile month of February has ended, (although with 5 straight days in the 80s here, I’m starting to suspect that we fast-forwarded to May), I thought I’d recap some of the recent market action, and add my thoughts on what the investing landscape looks like.
According to Senior Research Associate Andrew Adams of Raymond James:
- 75% of S&P 500 companies have reported positive EPS (earnings per share) surprises and 78% have reported positive sales surprises. If 78% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008.
- The blended [Q4] earnings growth rate for the S&P 500 is 15.2%. If 15.2% is the final number for the quarter, it will mark the highest earnings growth since Q3 2011 (16.8%).
- From December 31 through February 15, 127 S&P 500 companies have issued positive EPS guidance for 2018. This number is more than double the 10-year average of 49 for this same period and is the highest number of S&P 500 companies issuing positive EPS guidance for a year (through this point in time) since FactSet began tracking guidance data in 2007.
- All eleven sectors are reporting both earnings and revenue growth for the fourth quarter. The last time all of the sectors in the index reported both earnings and revenue growth for a quarter was Q3 2011.
Furthermore, the current 2018 bottom-up consensus operating earnings estimate for the S&P 500 is $156 per share. Just two months ago, on December 18, it stood at $145 per share, meaning we have seen about a 7.6% increase in earnings expectations due to a combination of the tax bill and a general sense of optimism among analysts and company managers. It also means 2018 year-end estimates are now about 25% better than the current 2017 year-end number, and that is coming off of what was already a very good 2017 (and the 2019 estimate is a further 10% better than the 2018 estimate). Earnings growth, more than anything else in today’s environment, is what drives stock prices higher, which is why we put more emphasis on the earnings data for the aggregate market than we do traditional (and often not very helpful) valuation measures.”
In Andrew’s opinion, “Not only are current earnings better than expected, but there are signs that they will get even better going forward. Therefore, until we start to see signs that corporate earnings may disappoint investors, we will continue to give the benefit of the doubt to the bulls over the intermediate and longer terms.”
So, fundamentally speaking, earnings growth seems very impressive, if Andrew’s notes are correct. Further, I believe that economic growth is good and is steady, if not spectacular. Valuation (like p/e ratios) and sentiment (how excited people are about stocks) have both pulled back recently, likely creating a better entry point for stocks.
I believe most market observers are keeping a close eye on interest rates. As interest rates move higher, bonds may become more attractive alternatives for money. In my opinion, that is why the stock market has been so volatile lately: interest rates have bounced up, causing some money to flee stocks and move toward the perceived safety of bonds. If rates move higher, I’d expect more of that.
In summary, conditions look favorable for stock investors, particularly in sectors that are not seen as substitutes for bonds, so not utilities, telecommunications, real estate, and consumer staples. However, rising interest rates could keep stock prices from rocketing upwards, and we may see more of the choppiness that has marked early 2018.
Whatever the future holds, we are proponents of taking as little risk as you must to help achieve your financial goals. One great way to help discover the correct risk/return balance for you is to have us prepare a Signature Life Plan for you if we haven’t already. If you already have one, double-check to make sure that you are in balance.
As always, these recommendations are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
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