Broker Check

The Positive Effect of Forward-Looking Earnings on the Market

| April 15, 2019

The sentiment for the third and fourth quarters of 2019 is that earnings will recover from the trough we experienced in the first quarter of the year.

Data firm FactSet analyzed investment analyst reports and determined there is a collective call for low single-digit earnings growth in the second and third quarters, followed by high single-digit growth in the fourth quarter. We hope that’s the case as the S&P 500’s forward-looking price-to-earnings (P/E) ratio is now back to trading at its average of 16.4:

It may seem as if the growth we’re experiencing currently is due to a rebound from Q4 2018. But what we really believe the forward-looking data show is investors are paying for future growth (of six- to nine-months out) now because they clearly feel better earnings are yet to come in 2019.

What’s driving the optimism?

For one, the potential of a finalized trade deal with China. An additional factor is the combination of no interest rate hikes and the promise of continued economic expansion.

A third reason is an upbeat tone in the semiconductor sector, which along with the transportation industry is viewed as a leading indicator for the overall stock market. In other words, as they go, so goes the market – and both sectors have done well in early 2019.

Another positive is the recent rise in oil prices. Since hitting a low of $46.24 per barrel in December 2018, prices have risen, which means more economic activity around the globe. March prices neared $60 per barrel and were expected to continue rising.

Lastly, while the U.S. dollar remains strong, it has retreated some, which bodes well for large, multinational companies and export growth. If this trend continues, earnings growth should rise among the largest publicly-traded firms.

So, even with all the economic data and political news inundating us every day, there is a key lesson here – earnings matter all the time. We’ll all be well-served if we never lose sight of that.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.