Market Beat: Looking ahead to third quarter earnings
September 19, 2018
As the third quarter is ending, I thought it might be a good time to look ahead and see how the forecasts for the corporate earnings reports are. Currently the analysts are optimistic.
The projected earnings growth rate for the S&P 500 is supposed to be 19.9 percent. If the earnings growth does come in that high, it will be the third-best earnings growth since 2010.
According to data from FactSet, all 11 S&P sectors are expected to report positive earnings growth and seven of those sectors are forecast to report double digit earnings growth. The growth should be led by the Energy, Financials, Telecom Services and Materials sectors. One concern in the Financials sector is the impact of hurricane Florence on insurance stocks.
The stock market is fully valued here as the forward PE or price to earnings ratio is at 16.8, which is higher than both the five-year average of 16.3 and the 10-year average of 14.4. Some of the earnings growth that we've seen over the last couple of quarters is due to the corporate tax cuts. The tax cuts did not increase capital investments very much. Most of the funds went to wage increases, employee bonuses, stock buybacks and dividend increases.
The economy appears to be doing very well here, but there are some signs that the rate of growth is slowing down a little bit. Some foreign economies are experiencing some stress. In the emerging markets we've seen a currency crisis in Turkey, South Africa start sliding into a recession and currency woes in Argentina. The MSCI Emerging Markets index is down -11.22 percent year to date as of Sept. 17.
China has been slowing down and its market has entered bear market territory registering a drop of over 20 percent from its high point, as of this writing the MSCI China index is down -12.83 percent year to date.
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Germany is one of the best barometers for the EU and it appears that their economic growth is flat now. The MSCI Germany index has fallen -9.97 percent year to date.
Fed policy is something we'll have to keep our eye on going forward, too. If the fed over tightens they could slow the economy too much and we could slide into a recession. There's a very good chance that we'll see a couple of more rate increases in 2018. The Fed has three more meetings this year.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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