The Week Ahead in Stocks – May 21
There are many drivers to the rally in equities. Some are more palpable than others, but bears cannot argue with the trend in earnings growth. Q1 2018 earnings season is nearly concluded, and S&P500 EPS is on course to set an all time high of $36.41.
Here are some highlights from the S&P earnings report.
“Q1 2018 estimate (93% real) up 7.2% from year-end 2017, as EPS setting record; 2018 estimate up 7.7%, 2019 up 8.8%.
Operating margin record high at 11.05%, 20-year average is 8.08%, as retail pulls it down.
Unsung hero, sales posting strong 9.5% Y/Y gain.”
In terms of valuation, this gives the S&P500 a PE ratio of 20.67 based on operating earnings, and 23.7 using reported earnings.
Historically this is above average, but not quite at danger levels considering the earnings growth expected in 2018. The forward 12-month P/E ratio for the S&P 500 is actually 16.4.
Q1 gave us the first reports with the tax reforms factored in and so far we can say the reforms lived up to expectations. EPS growth gives bulls confidence that the rally is real and justified and can keep on going.
Yet history tells us not to be complacent. Can companies really deliver the expected growth?
And what if they can’t? If EPS were to stall and price kept on the current trajectory, it would create unstable conditions. Conditions we have seen before.
We are yet to see this rapid multiple expansion and even if it happens, it could be forgiven for a few quarters due to bullish expectations. For now we are giving the S&P500 a clean bill of health based on earnings, but 2018 has a lot to live up to—Q2 will be very interesting as will the next 48 hours or so given the weekend news of a truce in the US-China trade war. Either way, history is telling us something.
Finally, some readers have asked about format, layout and content of my paid analysis service. One way of seeing this is to look at the Bitcoin work I do which is free to all.
Good luck and good trading.
Chief Stocks Analyst
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