The Bottom Line
- In technical terms, 2018 has been a challenge for equities. The S&P 500 has breached its 200-day moving average twice, experienced one full-fledged 10%+ intra-day correction, and another 8.9% downward lurch. And markets’ sensitivity to the increased news flow has generated a burst of trading sessions with intra-day swings of 1% or larger.
- But long term, it’s economic fundamentals that drive stock prices. And there, the picture has continued to improve – as have stock valuations.
- Think about the -10.1% fall of the S&P 500 between January 28 and February 8. That drop was accompanied by a -17.6% fall in the forward P/E over roughly that same period. As the P in the P/E ratio was falling 10%, the E was rising enough to more than make up for the fall.
- That means is that one key fundamental measure – projected earnings – was improving at the same time as stock prices were falling.
- We’re now at the beginning of this quarter’s earnings reporting season. As of the end of March, 19 companies in the S&P 500 stocks have reported, with 16 beating, one meeting, and two missing consensus earnings estimates. 14 of 18 of the companies beat their estimates of sales.
- This coming Friday, April 13th, the major banks will report (Citi, JP Morgan, Wells Fargo). Their profits and financial health will be scrutinized for signs of the country’s overall economic state.
- The bottom line: With earnings climbing and stock prices falling, the conventional wisdom that stocks as a group are still too expensive is not quite as clear. All the more if one believes there will be an earnings boost from both increased government spending and reduced taxes.
- Over and above this improving general market picture, some companies in the well-known indexes could surprise more than others. It takes a focused, dedicated research organization to tell the difference, and an active investing approach to take advantage of this knowledge to the benefit of investors.
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.
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. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.