Earnings Update … Growing into our Big Puppy Feet Valuations

With tax season being so awful this year and our recent client event concerning Social Security and Medicare, we have spent very little time discussing the latest earnings season.

Earning Season Update

Earnings are the winds in the sails of capital markets, even at lofty valuations. While capital markets have moved very little this year (fine by us, see Sideways) ultimately earnings do, and will, drive price movement, even if it is to only allow growth into the lofty valuations created last year.

Here are a couple of data points from our friends at Factset as of week ended 5-2-14:

• The blended earnings growth rate for Q1 2014 is 1.5%.
• On March 31, the estimated earnings decline for Q1 2014 was -1.2%. Nine of the ten sectors have higher earnings growth rates today (compared to March 31) due to upside earnings…
• For Q2 2014, 53 companies have issued negative EPS guidance and 19 companies have issued positive EPS guidance.

Interesting commentary again from Factset regarding the Dow:

…During this past week, the Dow Jones Industrial Average hit another all-time high value, closing at16580.84 on Wednesday. Given this record value, have companies in the DJIA been reporting strong earnings and revenue growth for the first quarter?

The answer is no. To date, 24 of the 30 companies in the DJIA have reported actual results. The blended earnings growth rate (combines actual results for companies that have reported and estimated results for companies yet to report) stands at -3.3%. If -3.3% is the final earning growth rate for the quarter, it will mark the third year-over-year decline in earnings in the past four quarters for the DJIA….

one our favorite charts we look at for longer term clarity:

The 10 year Shiller Cyclically adjusted PE ratio:

So what does it all mean ?

Earnings, the driver of higher valuations are growing. It appears the winter may have inhibited growth and we are accelerating as the summer months begin. BUT, we are at very high valuations currently. Just like a puppy with big feet, we can grow into these valuations, but there may be growing pains along the way.

For the record we become more positive as markets move sideways and earnings grow, its a better foundation to move forward on.

Have a Great Day!

John Kvale CFA, CFP