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Why Earnings Will Fuel The Stock Market’s Rise In 2018

Why Earnings Will Fuel The Stock Market’s Rise In 2018

The week of February 20 may help to give investors some clarity on the general direction of the stock market. But the good news is that earnings growth continues to build, and that should continue to be the focus for investors. Not rising interest, not inflation, just stay focused on earnings growth.

Mott Capital Management, Michael Kramer

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Earnings Growth

S&P Dow Jones Indices is estimating operating earnings to grow by a stunning 24.93 percent in 2018 to $156.25. It is also projecting earnings to increase by another 10 percent in 2019 to $172.10 per share.

Earnings expectation have risen since the end of 2017 as well, and that is a positive. Since December 31, 2018, estimates for 2018 have climbed by nearly 7 percent, from $145.80.

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Historically Cheap

With the S&P 500 trading 2,732 as of February 16, it was valued at 15.8 times 2019 operating earnings! Using data from S&P Dow Jones Indices, starting in 1988 through the end of 2017, the average operating P/E multiple has been 18.8, with a standard deviation of 4.1, making the range roughly 14.7 to 22.9. At our current earnings multiple, the S&P 500 is trading on the cheaper side of history, and likely has room to continue to rise. Should the S&P 500 just merely reflect the historical average of 18.8 times 2018 operating earnings of 156.25 by year-end, it would be trading at roughly 2,941. I still happen to think the S&P 500 can eclipse 3,000 in 2018.

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Sectors Cheap As Well

Even by sector standards, stocks are cheap, according to S&P, the information technology earnings send rising by 23 percent in 2018 to $62.57, while the group is trading at 18.7 times 2018 estimates. Healthcare is expected to grow by 24 percent in 2018 to $60.88 and trades at only 16 times 2018 estimates. As the chart below the S&P and some of its biggest sectors, technology, healthcare, and discretionary stocks are trading at historically cheap valuations, over the past decade.

S&P 500 valuation
S&P Dow Jones Indices

Paying A Multiple

2018 is all about earnings and growth and should earnings continue to stay strong then the multiple investors are willing to assign to those earnings should increase as well.

The question becomes can earnings estimates continue to rise, or shall those expectations begin to come down as the year goes on?

For now, it is hard to argue the stock market is expensive, especially when we looking at the possibility of very strong earnings growth over the next 24 months.

That is it for today. Good Luck

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Michael Kramer and the clients of Mott Capital own shares of NFLX and TSLA

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.

© 2018 Mott Capital Management, LLC.  Use, publication or reproduction in any media prohibited without the permission of the copyright holder.

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