MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN AAPL and GOOGL
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.
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.
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.
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.
Microsoft earnings estimates have increased since the end of September.
Amazon’s earnings estimates have also increased since the end of September for 2018, 19 and 20.
Johnson & Johnson (JNJ)
Johnson & Johnson’s earnings estimates have also remained flat.
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.
Facebook’s earnings have fallen, and they are down considerably since July.
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.
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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