This Is Why The Stock Market Sell-off May Be Overdone

This Is Why The Stock Market Sell-off May Be Overdone

This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.

Otherwise, enjoy the column!

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The market continues to be extraordinarily volatile, but earnings for 2019 are still expected to be robust and grow around 10% according to the latest data from Dow Jones S&P Indices. The most recent revisions as of December 6 suggests that earnings will increase next year to $174.01 per share up from $157.52 per shares in 2018. With the S&P 500 closing at 2,633 on December 7, the S&P 500 is now trading at 15.1 times 2019 earnings estimates and is now the lowest the multiple thus far in 2018.

S&P 500 earnings growth
Data from Dow Jones S&P Indices

Too Cheap?

Assuming earnings do not see a meaningful deterioration in the coming months, the current earnings multiple on the S&P 500 is at the lower end of the historical range since 1989.

Data from Dow Jones S&P Indices

Slowing Growth

Growth in 2019 is expected to moderate but as the chart below shows it is still very healthy growth based on the comparison in the past.

Data from Dow Jones S&P Indices

No Growth in 2019?

Even if we were to assume no growth in 2019, the S&P 500 would be trading at a PE ratio of 16.7. At its current valuation earnings would have to fall by 24% from current estimates of $174.02  in 2019 to $131.65 for the S&P 500’s PE ratio to rise to 20. It would wipe all the earnings growth seen in 2018 from the tax cut. At this point, although GDP is moderating, there are no signs to suggest the economy is going over that type of cliff. It would seem the equity market is acting in an extremely irrational way at this point or there is something dire lurking that is not clear.


Even when we look at some of the largest companies that make up the index, earnings estimate reduction have been small. Apple which is probably the at the center of the storm, with all the iPhone worries has hardly seen its earnings estimates reduced.  The stock has fallen 26% since October 1, yet earnings in 2019 and 2020 have dropped just 3% for each year.

AAPL Chart

AAPL data by YCharts


Microsoft earnings estimates have increased since the end of September.

MSFT Chart

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MSFT data by YCharts

Amazon (AMZN)

Amazon’s earnings estimates have also increased since the end of September for 2018, 19 and 20.

AMZN Chart

AMZN data by YCharts

Alphabet (GOOGL)

Alphabet’s earnings have fallen modestly.

GOOGL data by YCharts


JPMorgan (JPM)

Even when looking at JP Morgan its earnings outlooks is still stable as well.
JPM Chart

JPM data by YCharts

Johnson & Johnson (JNJ)

Johnson & Johnson’s earnings estimates have also remained flat.

JPM Chart

JPM data by YCharts

Exxon Mobil (XOM)

Exxon may be the wildcard in the group here. Obviously, with oil prices collapsing Exxon may see a considerable impact. But then again, they also have a huge natural gas business. But to this point estimates have not changed.

XOM Chart

XOM data by YCharts

Facebook (FB)

Facebook’s earnings have fallen, and they are down considerably since July.

FB Chart

FB data by YCharts

There are far more companies than the ones I have highlighted above, but these the among the largest in the S&P 500. These are the companies that carry the most significant weight, and in some cases, there seems to be a disconnect. It would suggest that S&P 500 has a big rebound on the way or analysts’ estimates are way too high and have much further to fall.

More tomorrow.


Photo Credit Via Flickr

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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