Things Look “Solid”

Mike Williams | 7th November 2017
Categories
Letter from America

The corporate earnings season in perspective, all seems well for the long-term investor. In fact, to see continued volatile churn during earnings seasons is actually a good sign. 

Not until every investor and commentator’s response is, for whatever reason, a positive one do we need to start worrying. 

So How Are Earnings?

In a word, earnings are “solid.” 

And looking at the latest forward data the word “acceleration” also comes to mind.

This type of consistent pattern is rarely seen. Of course, the moment you mention something about the stock market upside and accelerating earnings, you’re immediately overwhelmed at the howling of, "Yeah, but those are really signs of the end...it can't get any better..." 

And that’s been the same message for at least the last 10,000 points.

So get used to it.

The Stats

Here’s one for the nerds. 

The year-over-year growth rate of the S&P 500’s forward earnings estimate tracks the "expected" forward growth rate of the S&P 500 earnings vs. that same expected rate one year prior.

These adjust as calls are done and reports flow into the system. 

There is a real stretch going on as the stock market’s tech sector now covers nearly one-quarter of all returns, and the market-weighted indices are currently skewing much higher than the equally-weighted indices or portfolios. 

Just keep in mind it is all good for the long-term, patient investor.

Thomson Reuters provides a forward 4-quarter estimate each week, which for this quarter represents the sum of the bottom-up estimates from Q4 '17 through Q3 '18. 

Now, as of Friday's data close, the forward 4-quarter estimate of $142.16 grew 10.58% vs. the same estimate on November 4th, 2016.

The good news is that acceleration is still getting better as the 10.58% reading is a new post-2008 high for the "growth rate" of the S&P 500 forward estimate.

Some might ask: “And that means what exactly?”

Well, it tells us that the "one-year forward" S&P 500 earnings estimate, from an expanding collection of quarterly reports, is growing at a slowly accelerating pace.

Here’s how those forward estimates have moved since late September '17 before the current earnings season got rolling:

  • 11/3/17 - $142.16, +10.58%
  • 10/27/17 - $142.10, +10.18%
  • 10/20/17 - $142.25, +10.13%
  • 10/13/17 - $141.90, +9.81%
  • 10/6/17 - $141.87, +9.52%
  • 9/29/17 - $137.62, +10%

(Source: Thomson Reuters data)

Interestingly, in the past when we’ve witnessed an increasing growth rate in forward earnings you tend to see "P/E expansion" in the S&P 500 like so many experts cover on TV.

Except that we haven't.

You won't ever hear this from the pundits when talking about valuation but (and this is a big but) the S&P 500's forward P/E ratio today stands at just about the same level it was when 2017 started. 

Check the list again:

  • 11/3/17 - 18.2(x)
  • 10/6/17 - 18.0(x)
  • 7/7/17 - 17.4(x)
  • 4/7/17 - 17.4(x)
  • 1/6/17 - 17.15(x)

While no single piece of data moves the world it is a compelling positive that even with sentiment finally waking up a tiny bit after years of the stock market rally that valuation being "stretched" is not one of the arguments to fear.  

More Positives

Solid Chart1

This week, we should expect margin to continue to increase in the tech end of the market.

And for those of you who fear the end of things, consider that the US is facing the very early waves of change as our economy begins to take more of the reins of the "Barbell Effect."

This shift is set to cause more change in the next 15 years than we have seen in the last 100 years combined. 

Almost every aspect of what we experience in daily life will change so rapidly that many items will feel a little scary. But they will change. Instead of fearing things like AI and robots, these types of historic and fundamental industry sector changes have always led to more and higher paying jobs, larger economic output and new frontiers of growth.

Even Better

Keep in mind that none of this yet incorporates tax reform or the ability to bring dollars back into the US from overseas via repatriation. 

While the earnings explosion in tech was the big news last Friday, keep in mind a company like Microsoft has over 90% of its $138.5 billion in cash and short-term investments held overseas.

In Summary

The higher these market numbers get the more intense the stock market altitude sickness will be to overcome.

It's the long-term current we need to invest in and not the short-term waves that make a lot of noise when they hit the shore.

I’ll share what I thought was an interesting quote on this point about long-term planning and wealth management:

Solid Chart2