The S&P 500 May Be Cheap and On Its Way To 3,200

The S&P 500 May Be Cheap and On Its Way To 3,200

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Stocks continue to perform well and have mounted a sizeable come back since the December lows. At this point the S&P 500 is less than 5% off its all-time highs, will the NASDAQ and the Russell are roughly 6 and 8% off their tops. It is yet to be seen if the indexes can manage to reclaim their earlier highs. Despite earnings estimates declining they still point to positive growth for 2019 and 2020.

S&P 500 earnings forecasts

Fourth Quarter

The fourth quarter has turned out to be one of the worst in some time. With 96% of companies having reported results, 68% of them have beaten, while 25% have missed, and only 7% met.  The last time we saw results this bad was in the fourth quarter of 2016 when 67% of companies beat estimates and 22% missed, while 11% met.

(Data from Dow Jones S&P)

Earnings Continue To Fall

As a result earnings for 2018 and 2019 continue to drop, to $151.60 and $166.06, respectively. Additionally, the outlook for 2020 has fallen some too, to around $187.40.

(Data from Dow Jones S&P)

Below Norm Multiple

But the hint of good news here is that the S&P 500 is still trading at less than 15 times 2020 earnings estimates. The next chart below shows how the PE ratio versus 2020 estimates is well below the historical norm of the past two years.

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(Data from Dow Jones S&P)

In fact, in 2017 the S&P 500 averaged a one-year forward PE ratio of 17.1 times 2018 estimates. In 2018 the S&P 500 averaged a one-year forward PE ratio of 17 times 2019 earnings. This year the average is just 14.2

(Data from Dow Jones S&P)

Assuming the S&P 500 reaches its historical multiple of about 17 times 2020 earnings estimates the S&P 500 could rise to roughly 3,186.

If we assume earnings estimates for 2020 falls by 10% from their current levels, it will send the forecasts down to $168.66 per share leaving the S&P 500 trading at 16.6 currently.

At the very least, we could probably assume at this point that the S&P 500 is at worse fairly valued, and should the earnings outlook for next year stabilize, then one could argue that stocks are very cheap.

-Mike

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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.   

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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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