The ultimate driver of Capital Markets are Earnings. Yes, we can argue about interest rates, currencies, world political and economic cycles, but all of these events are only important in how they change earnings or the growth there of “Earnings”.
Let’s take a look at early statistics from 2017!
Earnings Via our Friends at Factset
This from Factset, one of our favorite data aggregators in their regular weekly report.
- Earnings Growth: For Q1 2017, the blended earnings growth rate for the S&P 500 is 13.6%. If 13.6% is the actual growth rate for the quarter, it will mark the highest (year-over-year) earnings growth for the index since Q3 2011 (16.7%).
Looking closely at the following chart, which is TRAILING earnings, forward looking capital market expectations can be seen. The trailing earnings are actually falling over the last few years, but the forward expectations as noted from the first bullet above are expected to climb more rapidly than the past six years.
So just where are these revenues that are creating accelerating growth coming from?
P/E or the Price to Earnings is the most blunt way to measure the valuation of capital markets. A high P/E might mean markets are overvalued and need to grow into their valuations, or a reversion to the mean reset to a lower level may be in the cards.
From Factset’s estimates above, the current market P/E is about 22 with a normal of 16-17, undoubtedly higher than normal but certainly no guarantee of an imminent reversion down to lower levels.
If the growth estimates mentioned in the very first bullet come through in 2017, much of this froth may be taken out of the capital markets.
Either way, we have your back via our good friend diversification!
There you have it, a nice ‘Earnings Update” … We will be watching closely!
Have a great “Earnings Update” Day!
John A. Kvale CFA, CFP