The Earnings Notch

Here’s an updated look at the S&P 500 and its earnings. The S&P 500 is the blue line and it follows the left scale. The earnings is the gold line and it follows the right scale. The two lines are scaled at a ratio of 16-to-1 which means the P/E Ratio is exactly 16 whenever the lines cross.

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The important takeaway from this graph is that right now we’re going through an “earnings notch.” As you can see, the gold is temporarily declining (modestly) for a few quarters.

The future part of the gold line is based on Wall Street’s estimate. The “earnings recession” is expected to last one full year; the last quarter of 2014 and the first three quarters of 2015. We’re in the middle of it right now.

By Q4 2015, the earnings line is expected to resume climbing higher. An earnings notch isn’t unprecedented. We went through a similar espisode, though not as severe, during the last half of 2012 and the first half of 2013. Once it passed, earnings growth returned.

The valuation of the S&P 500 appears to be elevated given the flat earnings. However, if expectations for 2016 and beyond are correct, then the index is still reasonably valued. (By the way, I don’t mean to imply that 16 times earnings is fair value for the S&P 500. It’s simply a reference point.)

Posted by on April 27th, 2015 at 10:58 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.