U.S. Stocks: Strong Earnings Season

Written by: Global Thought Leadership | August 03, 2018

Source: Bloomberg, S&P Dow Jones Indices, August 2, 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

  • This quarter’s earnings season has been strong. With over 80% of companies in the S&P 500 reporting so far,1 per-share earnings have beaten consensus expectations by 5.3%, bringing the current P/E of the index to 20.6 times current earnings. Sales per share have also beaten expectations by a little over 1.5%.
  • The sector with the largest upside surprise in earnings has been Consumer Discretionary, with an upside surprise for 45 of the 75 companies in the sector of 12.8%. Energy is the only sector missing its expected results, by -6.9%.
  • It’s important to keep in mind that expectations change during the course of the year; hits or misses can be as much about unreasonable expectations as about financial strength.
  • But current expectations are important to measure against history; they give valuable insight into whether the equity market is overly optimistic about future earnings.
  • Here, the news is positive overall; based on today’s consensus earnings expectations for the following 18 months or so, the S&P 500’s P/E for the end of 2019 should be about 17.2 times earnings, solidly below the average P/E over the past decade.
  • While P/E analysis can give a status report on the overall market, there’s substantial variation in results from sector to sector, within sectors, and for individual stocks.  For example, the Consumer Discretionary sector, with its 12.8% upside surprise, contains the Internet & Direct Marketing Retail subsector. Within that subsector, TripAdvisor Inc, surprised a relatively small 3.8% to the upside, while Expedia Group Inc surprised upward by 55%.
  • Bottom line: The equity market overall, as represented by the S&P 500, is solidly within the range of the past decade. But the wide variation in earnings results within the index suggests that fundamentals-driven active management can have an important place in an investor’s approach to building a portfolio for the future. For more, see Clearbridge’s Jeff Schulze most recent market assessment: U.S. Equities: Beyond the Wall of Worry.

 


1 Source: Bloomberg, as of August 3, 2018, 8:20 AM ET.

 

Definitions:

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.

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.

 

[1] Source: Bloomberg, as of August 3, 2018, 8:20 AM ET.
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