Equity Prices Are Rising While Earnings Expectations Are Falling

According to FactSet (Earnings Insight) data, S&P 500 companies earnings for 2017 at the outset of this year were anticipated to grow by about 11.5% (after basically flat earnings growth in 2016). 

For the 1st quarter of 2017, 57 (out of 82) companies issuing forward guidance have issued negative guidance: lower than expected earnings per share (EPS).

For all of 2017, expected earnings growth has been lowered to 10.3%.

The forward 12 month price to earnings ratio has jumped to 17.3 times.

Remember that the S&P 500 provided a total return of 11.3% through 2016, while earnings were, as I said basically flat. Which in simple terms, means that investors were looking ahead to 2017 for growth (even though the P/E ratio remained well above its 10 year average at 14.4 times).

So far this year, the S&P 500 is higher by about 3.5%.

In other words, earnings need to grow by close to an additional 15-20% (above the current 2017 expectations of 10.3%) to bring the P/E ratio back to its 10 year average (if S&P 500 prices remain at current levels).

Needless to say, we have more than built in a "phenomenal" US tax plan (if, as and when it becomes a reality) and buyers are pushing emotion to higher levels, while the fundamentals are showing us that prices are rather expensive on a relative basis.

As always, with our (High Rock) focus on the long-term, we think that short-term caution is the order of the day.

Equity market risk is rising and that becomes a warning signal. 

Have you looked into the risk levels in your portfolio?

Happy to help.

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scott@highrockcapital.ca

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