The Best Earnings Season In Years Makes Stocks Cheap

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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.

Data From S&P Dow Jones Indices

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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.

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S&P 500 Earnings Per Share TTM Chart

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.


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Tags: #sp500 #stocks #yields #rates #earnings 



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