Tag Archives: P/E

Earnings, a key driver to Capital Markets/Asset Appreciation … Friday

By a lot of metrics, capital markets may be frothy (our term), overvalued, or some even saying a “Bubble” (WAY over used in our opinion) ..
With a long term average of 15, a 24.6 Price to Earnings ratio (Prices divided by cumulative earnings of the capital market), the bluntest valuation instrument MAY be frothy.

BUT if earnings continue to grow, it would be logical for assets to at least maintain their levels and possibly even continue to appreciate, ESPECIALLY if the future looks bright!

Those steep declines represent a corresponding decline in asset prices… note this chart is going back to the 1800’s … we like long term views such as this…

Next week we will review the “here and now” of earnings and growth/sales  as we are in the middle of the 90 day treadmills we call earnings season….

Ahh… that is next week, today is Friday, enjoy your summer weekend !

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
http://www.jkfinancialinc.com
http://www.street-cents.com

Earnings, the key to Capital Market Growth … Let’s get an update?

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.

5-12-17 Factset EPS change and Price

 

So just where are these revenues that are creating accelerating growth coming from?

5-12-17 Factset Geographic Rev chart

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.

5-12-17 Factset 12 PE ratio V long term

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

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.
www.jkfinancialinc.com
www.street-cents.com

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:

 

Cape PE 5-5-14

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

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225

 

 

September 2013 End of Quarter Capital Market Review (Video.. 2 minutes finally)

The FOMC provided fireworks in September, clearly the biggest event of the month which caught participants off guard. Before we jump to that we wanted to discuss the most common valuation method for capital assets, the P/E ratio, and it’s value as of today.

September Video Review

P/E Update Chart

This P/E Chart is from the S&P 500 and is based on Operating Earnings (takes one time items earnings numbers out.)  Our original thinking was to show you how we compare today to the past, and how frothy we are today…wrong… from this info. With a 24 year chart (thanks Donald) visually, we are not that overvalued. We would argue that this time period was unusual and we are still frothy compared to a more normal period of time.  Looking to the second chart, from Multpl.com which goes back to the 1800’s it gives a more normalized ratio. There is absolutely no possibility that the historical data is as accurate as our most recent. But it shows a more normal ratio over longer time periods.

Bottom Line: As you can see the market can get more expensive and continue to rise. If history repeats itself, the downside happens much faster then the up.

10-2-13 SP Op Earnings PE

10-2-13 PE Ratio Chart

FOMC U-Turns on Taper

We are still puzzled on the reasons, but no matter, Big Ben and the FOMC crew turned on a dime and decided not to reduce the QE stimulus (bond purchases to keep rates lower) even after repeatedly saying they were. When the book is written we will know what occurred, our suspicion is there is more than meets the eye.

Our problem is expectation and credibility. The capital markets were clearly ready for the much-needed reduced stimuli but U-turning, participants were caught off guard and had to quickly adjust portfolios, fabricating certain positive movements. The FED had almost guaranteed they would reduce the stimuli numerous times, leading most including ourselves to an expectation of much-needed reduction.

UPDATE: Government Shutdown…DID THEY KNOW??

9-27-13 FOMC SPY Punchbowl

 Larry Summers V Janet Yellen as FOMC President

Three days before the FOMC U-turn move on taper, word hit the street that Larry Summers had declined the job as president of the FOMC.  While no one knows how close he was to being  nominated, it is a well-known fact that Larry Summers supports our view of less taper sooner (hawkish.) Janet Yellen is thought to be more dovish (supports extended stimulus.)  During the Greenspan era it was hard to recall a dissenting vote. Bernanke has openly allowed dissenting votes. It could be possible the next chair may actually lose a majority vote at some point during his/her tenure….We are the only ones that we know of that would ever even say this at this time….time will tell !

Summers V Yellen

Financial Times Inheritance Article/Interview

A very proud moment in September was our neat article on inheritance planning. The article ran on a Financial Times Service and was also picked up by the Wall Street Journal. While this article is not directed at clients, more for advisors (making it even more flattering) we have dissect the details in an earlier post as we have enormous experience in the matter and this is a huge item to occur over the next several decades.

FT Article John Kvale

Don’t forget the spooky month we are in, however often times the fireworks begins in this quarter and push through the end of the year.

Have a Great Friday!

John Kvale

http://www.jkfinancialinc.com
http://www.street-cents.com
8222 Douglas Ave # 590
Dallas, TX 75225