Earnings: A positive for prices

Written by: Global Thought Leadership | September 15, 2017
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Source: Bloomberg, as of 9/07/2017. 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

  • 99% of S&P 500 companies have reported earnings for 2Q 2017—and to say the news was good would be an understatement.1
  • Operating earnings for the 12 months ended June 30, 2017 were 18.1% higher than the end of June 2016, the best showing since a 19.8% gain almost six years ago.
  • This certainly helps explain the continued strength in equity prices—and why fears of increased volatility have not yet come to pass.
  • But while major stock indexes have seen double-digit gains this year, prospects for future appreciation will hinge heavily on further earnings growth.
  • Present expectations are encouraging—S&P 500 operating earnings are forecast to grow to $127.14 in 4Q17 and to $144.88 by the end of 2018—impressive gains of 9.7% and 25% respectively.
  • What does that mean for valuations? Based on an index level of 2,488.11 (the closing price on 9/11/17), the forward price/earnings (P/E) ratio of the S&P 500 was 19.57x for 4Q17 and 17.17x for 4Q18.  Those valuation levels are somewhat elevated by historical standards, but as always P/Es can vary greatly among the hundreds of companies that make up the index.
  • Some of these stocks could be overpriced and some underpriced—both situations representing opportunities for investors that take a selective approach rather than a broad-based index approach.
  • That’s the expertise of active US equity managers like ClearBridge and Royce -- who dive deep into company fundamentals to identify potential pricing distortions that make it possible to capture unrealized value, and sidestep stocks that are too steeply priced. 

1 Source for all data is S&P Dow Jones and Bloomberg.

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