Crossing Wall Street Review – September 29, 2017
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
Expect a Good Earnings Season Next Month
On Thursday, the government updated its report for Q2 GDP growth. They now say that the economy grew, in real terms, by 3.1% during the second quarter. That makes it one of the better quarters in this cycle, but will the good news last?
I’m not so sure. We may slip back into our 2% trend line that’s been very hard to shake for several years now. The Atlanta Fed’s GDP Now forecasts Q3 growth at 2.1%.
Earnings season will soon start; at that point, we’ll get a much better look at how the corporate world fared during Q3. Remember, of course, that profits and the broader economy don’t always need to move at the same speed, or even in the same direction.
Wall Street currently expects the S&P 500 to report Q3 earnings of $32.90 per share. That’s the index-adjusted number. As is often the case, that figure has been pared back as earnings season approaches, but the estimate cuts have been less than we saw during Q2.
If the forecast of $32.90 is correct (if!), that would translate to quarterly profit growth of 14.7%. It would also be the sixth quarter in a row of profit growth for the S&P 500. Some of the previous growth has relied heavily on share buybacks. We’re seeing less of that recently. Share buybacks are down 25% since the start of 2016.
The S&P 500 is currently expected to earn $127.05 this year, and $144.71 next year. That means the stock market is currently going for 17.3 times next year’s earnings. That’s elevated, but I wouldn’t say it’s an obvious bubble. Let’s also remember how low bond yields are. To give you an example, the yield for a five-year TIPs (the inflation-protected securities) is just 0.16%.
This should also be the 30th quarter in a row of growing dividends. As I’ve pointed out a few times, this rally has been about dividends almost as much as it’s been about share prices. For all the talk we’ve heard of a bubble, stock prices have largely kept pace with dividends.
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