In our earlier Earnings (90 day treadmill) update and Economic post we mentioned we would update the earnings picture and also add a few “Non Wall Street” examples for simplification.
According to Thompson Reuters, 44% of the S&P 500 Companies have now reported (90 day treadmill) with 77% beating expectations with about a 5% upside surprise.
An Example of why we watch this: The P/E Ratio, One of Many Factors
As promised earlier, we wanted to simplify a “Wall Street” lingo item and explain how it impacts the capital markets.
Most of you are familiar with home ownership and purchasing, so let’s use price per square foot as a simple example to demystify a bit of “Wall Street” lingo. Think of P/E (Price divided by Earnings) as a parallel to price per square foot of a home. As the value of the capital markets increases, earnings must also rise in order for the Price Per Square foot (P/E) not to go up as well.
Is it as simple as that? Well not really
As an economy runs through a normal economic cycle of peaks and troughs of earnings growth, the P/E will expand as earnings grow and shrink as earnings fall.
There is one other item, market participants put the greatest importance on future earnings, so estimated profits and company predictions are much more important than current earnings.
The average forward P/E ratio is around 15, depending on the time frame measured, again think of this as Price Per Square Foot.
So where are we now?
According to our favorite service AFG View, the S&P 500 is trading at a forward 14 P/E and expected growth rate of 12%.
This has quickly become more detailed than I had originally intended, so in order to keep your eyes from glazing over further, I will move on and expand more in the future.
Frozen Tundra in DFW
Last night, meteorologists correctly predicted a cold blast here in the Dallas
Fort Worth Area, as such, the local area is moving rather slow this morning as it is debatable on local driving skills given normal weather conditions! HaHa
Not withstanding the weather conditions, I will be traveling to San Diego CA tomorrow afternoon, fingers crossed for a timely departure, for an excellent investment related conference. My return should be interesting on Saturday as many last-minute Super Bowl attendees will most likely share our return destination.
Have a Great Day !