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.


The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Equity securities are subject to price fluctuation and possible loss of principal.

Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies.


This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. All investments involve risk, including possible loss of principal. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland:
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.


Previous Editions

Click on a date to view that week's edition of charts.


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