Earnings Estimates Remain Stable

The good news is that S&P 500 earnings estimates remain relatively stable based on the latest update from S&P Dow Jones. Currently, the firm is forecasting earnings of $165.28 per share in 2019, down from $165.50 from last week. Meanwhile, the estimates for 2020 are at $185.27 down from $185.30 last week.  (Premium Video: Tariffs Are Not The Most Important Thing Happening In The Market)

(Data from S&P Dow Jones)

Additionally, the PE ratio has dropped to around 14.85 times 2020 earnings estimates, which is also down from last week, while the 2019 PE ratio is down to 16.6.

So the good news is that earnings estimates remain stable and that the market is getting cheaper, without the loss of too much in earnings power. The bad news is that none of these estimates likely include the effects of the tariffs. Which leaves still leaves us to guess at what the potential impact could be.

Earnings Growth

The earnings growth chart below shows how much it has changed over the past few weeks. Earnings growth is still expected to be around 9% this year; however, most of that growth is coming in the fourth quarter, which I worry may be too high. The second and third quarter is expected to see a growth rate of around 4%.

(Data from S&P Dow Jones)

This next chart is what the growth outlook had looked like on April 13. We can see the significant uptick in the first quarter results.

(Data from S&P Dow Jones)

The Potential Impact

When we think about the market currently, in a no tariff world, we could easily argue that the market is relatively cheap based on the current and one-year forward PE ratio. However, knowing that the tariffs are still not reflected in these estimates, we would expect them to continue to fall. I have read the hit could be by as much 4% to eps estimates for 2019. That would reduce 2019 estimates to around $158.76 per share, placing the S&P’s PE at roughly 17.3 for 2019, and 15.5 times 2020 forecasts of $177.86. It would take a 13% hit to 2020 earning estimates to get the S&P 500 to an earnings multiple of 17, which seems pretty extreme.

At this point, I think the uncertainty of the trade war and rising tensions may continue to weigh on stocks. However, the tariff disruptions are likely not to push the economy or earnings to plunge into a recession. However, it is likely to slow GDP and earnings growth.

The market will continue to stress over this “new” environment for a while a longer, but it also likely to come to its sense at some point, it always does.

-Mike

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