Pathlight President, Adrian Larson, provides a recap of the fantastic earnings growth S&P 500 companies have reported in the first quarter of 2018 and why he thinks markets will eventually take notice.
Earnings are in, and growth is good
As of May 4th, 409 of the 500 S&P 500 companies have reported their first quarter 2018 earnings and the results are nothing less than spectacular. According to Thomson Reuters, 79% of companies have beaten EPS estimates, and 76% have beaten revenue estimates, both metrics well above historical averages.
Posted growth figures are impressive, with earnings growing at just shy of 26% year-over-year and reported revenues growing at 8.4% versus 1Q2017. The revenue growth of 8.4% is the fastest reported growth since the first quarter of 2012.
See the full earnings scorecard at http://lipperalpha.financial.thomsonreuters.com/2018/05/sp-500-17q1-earnings-dashboard/
With such great growth, why has the market been “weak”?
One never knows exactly why the market reacts one way or the other, and at Pathlight we are not trying to gamble on direction, but a few thoughts have formed as to the why when it comes to the stock market weakness in the face of a solid business environment.
The first thought is that the solid earnings were well telegraphed given the passage of the tax bill in 2017. Stocks rallied in 4Q2017 by 6% to close the year, and then the month of January 2018 added another 6%, so more than likely we pulled some performance into those periods which reduced the fuel in the tank for the actual news.
The second is the new narrative that global growth is actually beginning to moderate based on the various global PMI’s (Purchasing Managers Index) peaking in late 2017 and early 2018. These PMI’s track global manufacturing activity and if they are moderating, the expectation is that global economic activity will not be as strong. Keep in mind that all of these readings remain well above the 50 mark which delineates growth versus contraction, so no recession, just lower growth.
Valuations are now getting back to normal
The great benefit of strong earnings growth combined with weak markets is that valuations can quickly move from overvalued to either fairly-valued or undervalued. Bears on Wall Street have been saying for the last 500 S&P points that stocks were overvalued and we peaked out at a forward P/E over 18. We now stand at a forward P/E of 16.1 after the decline in February, and if you begin to value stocks based on the full 2019 estimates of $175, then we are only trading at 15.4x, which is right inline with historical averages.
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