Tuesday, August 5, 2014

Rising Earnings Estimates Offsetting Falling Valuations (excerpt)


Stock market investors have been jittery since the start of the year mostly because valuations have been stretched. That’s been especially noticeable in the performance of the SmallCaps. It’s also been reflected in the P/E-led correction in the stock market. On the other hand, industry analysts remain very upbeat on the outlook for earnings, especially forward earnings. As long as their optimism continues, it should offset investors’ jitters about valuation. Consider the following recent developments:

(1) Forward P/Es. There has been a significant correction in the forward P/Es of the S&P 500/400/600, especially for the SmallCaps. The forward P/E for the S&P 600 peaked at 19.3 on March 18 of this year and was down to 17.2 as of yesterday. It remains 11% below this year’s peak.

The S&P 400’s forward P/E of 16.6 is down 6% from the year’s peak of 17.7 on March 4. This valuation multiple rose to a bull market high of 15.7 for the S&P 500 on July 3. It was down only 3% since then to 15.2 yesterday.

(2) Forward earnings. Helping to offset the drop in these valuation multiples are the solid performances of forward earnings. Indeed, they rose to new record highs for the S&P 500/400/600 last week. They’ve been doing so at a faster pace in recent weeks.

Today's Morning Briefing: Secular Stagnation? (1) Updating the “Great Rotation.” (2) Good, not great. (3) How much longer will money rotate from SmallCaps to LargeCaps? (4) Jittery investors lower P/Es, while analysts raise E estimates. (5) Forward P/Es cheaper, but not cheap. (6) Forward earnings making new highs. (7) Larry Summers is an important fellow with a debatable thesis. (8) Less support for his secular stagnation hypothesis in the labor market. (9) Consumers are earning more and spending more. (10) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

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