Expectations for Earnings heading Up; Valuations stay Reasonable

by Laura Ehrenberg-Chesler on January 16, 2018

in Earnings,equity market

Stocks prices have been on a solid upward trajectory as we all know but, so have earnings estimates. This is from Ed Yardeni today:

“(1) 2018 and 2019. The Tax Cut and Jobs Act (TCJA) passed at the end of last year is already boosting earnings estimates. Joe reports that analysts’ consensus estimates for S&P 500 operating earnings in 2018 rose a whopping $2.13 w/w to $150.15 per share during the first week of January. The estimate for 2019 rose $2.23 to $165.35.

Remarkably, revenue estimates also seem to have been boosted, but we think that’s attributable more to animal spirits than the TCJA. Industry analysts are now expecting revenues to rise by 5.7% this year and 4.6% next year, following the 6.3% gain last year.

Through January 4, profit margins are projected to rise from 10.5% for 2017 to 11.2% this year and 11.8% next year.

(2) Forward earnings. On a y/y basis through the second week of January, the 52-week forward consensus expected earnings of the S&P 500/400/600 are up 13.1%, 18.8%, and 15.0% (Fig. 6). So they account for much of the increase in their respective stock price indexes over this period.

As a result, forward P/Es are elevated, but aren’t much higher than a year ago. The S&P 500 has a forward P/E of 18.5 currently, up from 17.1 a year ago. On the other hand, the S&P 400 and 600 forward P/Es are basically unchanged at 18.4 and 20.0 now vs 18.8 and 19.9 a year ago.

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