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With earnings starting to wind down, it is becoming quite clear that this has been one of the best earnings seasons in years! With nearly 81 percent of companies in the S&P 500 reporting results through May 3, almost 77.5 percent have beat earnings estimates, while almost 17 percent have missed, and 5.6 percent have met. I compiled the chart from data from Dow Jones S&P Indices, and it shows that to this point, this has been by far the best quarter when it comes to companies beating expectations since 2012.
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Cheap To Earnings
According to Dow Jones S&P, 303 of the 405 companies reported so far, have beat on sales estimates as well. Sales in the first quarter are estimated to have risen by nearly 10 percent as well, making this quarter more than just about the bottom line.
Earnings for the full year in 2018 are forecast to rise to $153.06, and $170.48 in 2019. It leaves the S&P 500 trading at 17.4 times 2018 estimates and only 15.6 times 2019 earnings estimates.
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Cheap To Rates
Even with the rising interest rate scenario investors have become concerned with, the ratio of the 10-year Treasury yield to the S&P 500 yield, is only at 1.56. Explained, it means that the 10-year yield at 2.95 on April 30 is 1.56 times more than the S&P 500 yield of 1.89 percent. The average ratio since 1962 is 2.19 with a standard deviation of 0.86, a range of 1.32 to 3.05. So the S&P 500 is still on the cheap side of the historical average, and the historical norm. The chart below shows us just that.
Stocks Are Cheap
It is clear from the chart above that in late 1990’s and early 2000’s, which saw the ratio explode as the stocks soared, in the bubble years, just how overvalued the market was to bonds at the time. So at this point, yields would have to rise a lot further. It would take yields on the ten-year to reach 4 percent to get to the historical average, before stocks would start looking for expensive to bonds.
For, now it continues to be tough to say that stocks are overvalued to earnings or bond yields.
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GDP Growth
I have become increasingly more bullish over the past few weeks, and I expected to remain optimistic for some time to come. In fact, I think the recent slow down in the US economy is also going to start picking up rather nicely. In fact, over the past ten years, earnings growth has been a leading indicator to US GDP growth, as the chart below shows. That would suggest over the next two quarter we should see a significant ramp up in GDP growth.
S&P 500 Earnings Per Share TTM data by YCharts
It also continues to support my thesis that we will see an acceleration in job creation.
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Low Inflation
But I still believe inflation levels will remain low, and that will keep a lid on Treasury rates from rising too much. Counter-intuitive, yes, but we need to remember also we are living in a very different time, where automation and companies like Amazon are continuing to make things cheaper for the consumer.
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The Fed
Additionally, the Fed will not want to be responsible for killing the party and inverting the yield curve. With two year yields at 2.5 percent and the ten-year at just under 3 percent, the spread is now only 50 bps. One more rate hike gets the two-year to probably around 2.75, and that is all the Fed will be able to in terms of rate hikes in 2018. I still we get only one more.
-Mike
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Tags: #sp500 #stocks #yields #rates #earningsÂ
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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.
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Mott Capital's Market Chronicles January 10, 2025 12:02 PM