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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.
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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.
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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Tags: #sp500 #stock #market #3000 #rise #earnings
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.