Market Beat: Looking ahead to first quarter earnings
The first quarter of this year has been a good one for the stock market.
As of last Friday, March 22, the S&P 500 was up 11.72 percent year to date, the Dow Jones Industrial Average had a gain of 9.32 percent and the NASDAQ had risen by 15.74 percent.
Crude oil is up 25.37 percent and gold has a gain of 2.35 percent. Bonds have also risen somewhat, the TLT, the exchange traded fund that is composed of long-term U.S. Treasury bonds has posted a year to date gain of 3.21 percent.
Earnings reporting for the first quarter will get going in the next few weeks. Earnings growth for the stock market has been in the double digits, but that is expected to slow down. According to data from FactSet, currently the forecast for earnings this quarter is a decline of -3.7 percent. If earnings do drop this quarter, it will be the first fall in year over year quarterly earnings since 2016. All of the 11 S&P 500 sectors are predicted to have lower growth rates. Corporate revenues are expected to grow by 4.9 percent.
The market is also fully valued at this point. The forward PE or price to earnings ratio is 16.6, which is higher than both the five- and 10-year averages. The five-year average is 16.4 and the ten-year average is 14.7.
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About one fourth of S&P companies have issued EPS or earnings per share guidance for this quarter and of those 73 percent have issued negative guidance. The majority of the negative guidance forecasts are coming from two sectors, Health Care and Information Technology.
The Energy sector is expected to have the greatest drop in earnings growth at -17.5 percent. The next worst sector for earnings growth is expected to be the Materials sector with a fall of -11.7 percent. The Information Technology should be third with earnings predicted to decline by -10.7 percent.
The Utilities sector is expected to have the best earnings growth with a forecasted gain of 4.8 percent. Health Care should be the next best with a gain of 4.0 percent, even though many companies within that sector have been lowering their guidance.
For the remainder of the year, the forecasts are for earnings growth to pick up again over the next three quarters and we should see a return to positive earnings growth for the rest of the year, but it’s not expected to be double digit growth like we had last 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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