The S&P 500 and Its Earnings

Here’s a look at the S&P 500 along with its earnings line. The S&P 500 is in black and it follows the left scale. The earnings line is in gold and it follows the right scale. The two lines are scaled at a ratio of 16-to-1 which means that whenever the lines cross, the market’s P/E Ratio is exactly 16. I don’t mean to imply that the market is fairly valued at 16 to 1. It’s simply a guidepost for this chart. The future part of the earnings line is based on analysts’ estimates.

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As you can see, the earnings for the S&P 500 have entered a slight rough patch. Earnings growth is expected to flatline from Q4 of 2014 through Q3 of 2015. This isn’t unprecedented, even in this bull market. Earnings stagnated for the last half of 2012 and the first half of 2013, but the market did quite well.

Starting in Q4 of this year, earnings growth is expected to ramp up again. I should add that I don’t trust the longer-term forecasts of analysts, but it’s interesting to see what the crowd expects. I also think it’s interesting how the long-term forecast usually boils down to returning to the trendline. Notice how nice and neat the last part of the yellow line is? Only a model could forecast that.

In 2012 and 2013, the market bet that the earnings slowdown was transitory, and they were right. They’re making a similar bet now, but the difference is that the market is more richly valued today. See how the black line is currently well above the yellow line as opposed to mid-2012.

If the analysts’ forecast is correct (HA!) and if the market trades at 16 times earnings at the end of 2016, that means the S&P 500 would gain less than 3% over the next 22 months.

Here’s the same chart again but with data since the beginning of 2010. I made two other changes. The future part of the earnings line is in red, and the blue line was the earnings forecast on September 30. I think most of the earnings downgrade is due to the stronger dollar. Simply put: It knocked a year off earnings growth.

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Posted by on March 3rd, 2015 at 9:17 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.