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.
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.