U.S. Stocks: Earnings Power Forward

Written by: Global Thought Leadership | October 26, 2018

Source: Bloomberg, October 25, 2018.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

For investment insights on current market volatility, explore QS Investors on October's volatility and market rotation and ClearBridge Investors on potential opportunities from current market conditions

  • Whatever the causes of the volatile stock market in 2018, rising corporate earnings have been more a source of support than a cause for worry.
  • It’s certainly true that this quarterly earnings season has seen a small number of high-profile earnings shortfalls, including 3M, Caterpillar and now Amazon.
  • But other bellwether companies such as Boeing, United Technologies and Netflix have seen earnings strongly exceed expectations.
  • Indeed, among the 229 companies in the S&P 500 that have reported thus far, earnings have exceeded expectations by an average of 6.15%[1], with none of the 11 sectors of the index reporting net disappointments.
  • Perhaps more importantly, aggregate earnings forecasts for the S&P 500 have risen strongly all year, up some 11.4% since early January.
  • So there are arguably better reasons to explain the skittish tone of the markets, including the prospect of higher rates worldwide; global trade tensions; potential challenges to China’s breakneck growth; the rekindling of military rivalries between Russia and Nato, and more.
  • But remember that the S&P 500 eventually recovered from its 11.4% downdraft in February when earnings expectations continued to climb, as they are doing today.
  • Though negative surprises can unfold anytime, when stocks decline in the face of improving fundamentals, astute active investors may be able to take advantage of lower prices.

 


[1] Source: Bloomberg, as of close of business on October 25, 2018.

 

Definitiions:

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.

Forward earnings are a stock’s (or index’s) estimated earnings per share (or estimated index earnings), usually one-year ahead.

 

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