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It will not be a busy a week in comparison to previous weeks. Economic data will be slow with just PPI and CPI reports in the US, while earnings will be coming in at a slower pace. Nearly 77% of the S&P 500 companies have reported results, and 72.5% beat estimates, while 19.5% have missed. Overall it is has been a better than expected earnings season.
(Data From S&P Dow Jones)
Earnings estimates for 2019 have dipped a bit again this past week to around $164.89 from $165.35 last week. Meanwhile, 2020 results have dropped to $185.52 from $186.26.
(Data From S&P Dow Jones)
However, the S&P 500 is trading at roughly 15.9 times 2020 estimates, which is still well below the historical averages since 1988.
So while the S&P 500 continues to get more expensive, it is still trading below its historical averages and it puts the index on a pace to reach roughly 3,150 at some point in 2019. Should that happen, it would push the one-year forward PE ratio to around 17.
That scenario would present about 7% upside to the S&P 500 from its current level of about 2,945. The risk-reward benefit is starting to becoming smaller at this point.
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While it is possible to get multiple expansion beyond 17 times, I’d think at over 18 it would start pushing the index into overbought territory. It would suggest to me that one needs to potentially begin to think about the possibility for upside in the S&P is diminishing.
At this point, it is hard to think further out and start to project where stocks go. However, I think at the very least we should begin thinking about the risk/reward profile.
Additionally, some of the major global indexes are more mixed and are starting to diverge from one another. In the late winter and early spring, we saw all the indexes heading in one direction, which was up. As you will see below, that is no longer the case.
The Shanghai composite is sitting at a critical level of support at 3,065. If the index should break this level, it could result in a decline back to around 2,900. Additionally, the RSI is in danger of breaking its uptrend, which would be another negative.
Hong Kong HSI
The Hong Kong HSI has been consolidating now for some time, and it is nearing a potential break out which could send it to 31,400.
Meanwhile, the DAX index is approaching resistance at 12,529, and its RSI is overbought levels. That presents a challenge for a break out above 12,530.
Again, it all suggests that while the short-term in the equity market continues to look healthy, the longer-term outlook is starting to come to a point were there potential for future returns are diminishing, and the risk/reward scenario is beginning to become more neutral, from what had been overwhelmingly bullish.
Have a great week!
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 results.