Is The Glass Half Full or Empty, or Merely Too Big – Perspective Matters

It is Friday, and generally, I find this is an excellent time to look at where the markets are on a fundamental basis. The most exciting thing I realized today is how the earnings multiple of the S&P 500 on a trailing-twelve-month basis is now around at 19.7.

Generally, I am not a fan of this multiple because I believe the market cares more about the future than the past. But anyway, I bring this up because this is the lowest that earnings multiple has been since June 2016. That, of course, was Brexit, the rate on the 10-year Treasury hit an all-time low, and the S&P 500 was trading around 2098. The world literally felt as if it was on the verge of a meltdown. Meanwhile, we were also in the middle of an earnings recession. It turned out that it was the last quarter of the earnings recession. At that point, the S&P 500 was also trading at 16.9 times one-year forward estimates.

Not only that, but earnings had fallen from a peak of $114.51 in September 2014 to a low of $98.17 during June 2016. The last time the earnings had been that low was on March 31, 2013, on a trailing-twelve-month basis.

Anyway, when you look at this chart below, I think it puts things into context. I used the earnings data provided by S&P Dow Jones going back to 1988 and the projections through the year 2020; I overlayed that with a chart of the S&P 500. I think it is self-explanatory.

We can see pretty clearly in the chart the relationship between price and earnings.

Where you think the market goes from here, can primarily be based upon where you think earnings are going from here. If you are in the camp that earnings estimates for 2020 are too high and they need to fall 10%, as they had for 2019 from their peak of $177 in August 2018, basically suggesting you see no earnings growth in 2020, then you can make a case that the S&P 500 is fairly valued.

If you believe we are heading to a recession and earnings are going to fall off a cliff, then the market is likely overvalued.

I can’t tell you what to believe. But based on the facts that we have presently, one could say that the equity market is attractively valued, and should earnings grow as expected over the next two years, likely has a great distance to rise.

Have a good one

-Mike

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