A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

October 5, 2015

3Q earnings: News and clues
S&P 500 operating earnings and price/earnings (P/E) ratio


Source: S&P Dow Jones, as of 9/24/15. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • The 3Q corporate earnings season begins this Thursday, and what investors learn could set the direction of the market for the rest of the year.
  • Close attention will undoubtedly be paid to margins and revenue growth—clues to how companies have managed challenging global economic conditions.
  • Corporate guidance on future earnings will also be in focus—which could help frame investors' thinking about the Federal Reserve's policy path, which currently seems to plot a first rate hike later this year. Weak guidance may lead some to believe that the Fed to hold off for a little longer.
  • S&P 500 trailing twelve-month (TTM) operating earnings have already come down from a peak of $114.5 in September 2014 to $108.3 in June 2015.
  • And expectations for TTM operating earnings for the 12-months ended September 30, 2015 were $107.4 as of 9/24/15—down over 15% from $126.7 at the beginning of the year.
  • Not surprisingly, as earnings came down and expectations were lowered, the S&P 500's price also adjusted—correcting 12.5% between its high on May 21, 2015 and the most recent low on August 25, 2015. As of 9/30/15, it was still 9.9% below the May peak.
  • Yet expectations for TTM earnings at the end of 2016 were $129.5, which, if attained,would represent a 19.5% gain from $108.3 in June 2015.
  • That also means, that at price of 1,881.77 (the close on 9/30), the S&P 500 would trade at a forward P/E of 14.8x—a couple of points lower than where it was prior to the correction.
  • The key question of course is whether $129.5 is attainable—or if that expectation will begin to be revised lower as well.
  • It may take time before the answer to that question is clear—a period that could continue to be marked by higher volatility than investors have become accustomed to in recent years.
  • As risk begins to matter again, being invested in higher quality companies—regardless of market capitalization—should be more important than just being invested in the market.

The chart:

  • The chart shows trailing 12-month operating earnings for the S&P 500 from December 2006 through June 2015 and forecasted earnings for September 2015 through December 2016.
  • It also shows the trailing price/earnings (P/E) ratio for the S&P 500 from December 2006 through June 2015 and the forward P/E for September 2015 through December 2016.


The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Operating earnings is profit earned after subtracting from revenues those expenses that are directly associated with operating the business, such as cost of goods sold, administration and marketing, depreciation and other general operating costs.

The price-to-earnings (P/E) ratio is a stock's (or index's) price divided by its earnings per share (or index earnings).

The forward P/E ratio is a stock's (or index's) current price divided by its estimated earnings per share (or estimated index earnings), usually one-year ahead.

Market capitalization (market cap) is the total dollar market value of all of a company's (indexes) outstanding shares; it is calculated by multiplying a company's (indexes) shares outstanding by the current market price of one share.


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Will China's official growth rate fall to 6 percent by the end of 2015?


Will China's official growth rate fall to 6 percent by the end of 2015?

Yes: Economic reform measures will take their toll on growth
Yes: Demographics and urban labor shortage will constrain demand
No: New monetary and fiscal stimulus will restore rapid growth
No: Recovery in the US, Europe and Japan will more than make up for slowing domestic demand

Previous month Poll

When will the Fed raise the Fed Funds target rate?

Not until 2016