Market Beat: Q4 earnings release and the PE ratio
TRUCKEE, Calif. – The stock market had a good year in 2012 and has opened 2013 with a bang. This year the S&P 500 is already up more than 3 percent. Though the stock market reacts to a variety of economic reports, political decisions and global events, the main driver of the stock market is corporate earnings.Corporate earnings are dependent on the economy, but regardless of what’s going on in Washington, D.C., or the Euro zone, as long as corporate profits are good, the market should perform fairly well.Many stock market analysts use a metric to evaluate stocks known as the PE or price to earnings ratio. The PE ratio is simply the price of the stock divided by the companies’ earnings per share.If a stock has a high PE ratio that implies that the market has pretty high expectations for the earnings growth potential of that company. A stock with a low PE ratio is known as a “value stock” and that ratio implies that the market is not expecting real high earnings growth from that company.The PE ratio can also be calculated for the market as a whole. For the S&P 500 that is done by getting the PE for all 500 stocks that make up the index. If the market’s PE ratio is high, the market may be considered expensive, if the market’s PE ratio is low, the market may be considered to be cheap. Currently, the PE ratio of the market is about 16.3, which means that is takes $16.30 to buy $1.00 of earnings. Historically this is not a very high level.After the end of each quarter corporations release their earnings for the prior three months and the release of those numbers has a real impact on stock prices.Alcoa and Wells Fargo Bank are two of the major companies that have already reported their earnings and their reports were pretty good. Alcoa reported a profit of $242 million on revenues of $5.9 billion. Last year they reported a loss for the same time frame. Wells Fargo also had a decent report as they earned 89 cents per share on revenue of $21.9 billion.Over the next few weeks most of the major companies will report and the release of those numbers is something that can create some volatility in the individual stocks and have an effect on the overall market.Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at http://www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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