Market Beat: Fourth-quarter earnings
Corporate earnings are the primary driver of stock prices. The stock market has been volatile lately due to a variety of factors. Earnings reporting for the fourth quarter is just getting started and will get into full swing over the next few weeks. As of this writing only 4 percent of S&P companies have reported so far.
Some of the large banks have already reported, including Citigroup who reported better than expected profits, but they did post a large drop in bond trading income.
We should expect some increased volatility in individual stocks as they report. Earnings reporting always has the potential for increased volatility in stocks, but this quarter the volatility could be higher than normal. Volatility is measured a couple of different ways. The historical volatility is measured by the standard deviation. Future, or implied volatility is measured by the options prices of the underlying equities. Currently, the implied volatility of at the money options on stocks is higher than normal. The options prices indicate an average move in the stocks of 7.4 percent, which is the highest it has been since 2008-2009.
The market valuations are also fairly high right now, though not as high as the were a few months ago. Presently, the forward PE or price to earnings ratio for the S&P 500 is 15.1 which is below the five-year average of 16.4, but higher than the 10-year average of 14.6.
Not many companies have reported yet, but of those that have, 90 percent have reported better than expected earnings. Earnings growth for the quarter is supposed to come in at 10.6 percent, which will be the fifth straight quarter of double-digit earnings growth if it does hit that level. Earnings growth is forecast to be led by the energy, industrials and communication services sectors.
According to data from FactSet, the energy sector is forecast to have the highest growth rate at 73.0 percent. Industrials should be next at 14.4 percent, followed by communications services at 13.6 percent.
One factor that could have an impact on earnings is trade with China and tariffs. So far, about half of the reporting companies have cited negative impacts from China, but the other half have reported positive results. The possibility of a trade war and the current government shutdown are two things that could have an impact in the future. Currently the forecast for this year is for earnings growth to slow down from the present double-digit rate.
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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