Stocks have risen sharply since 2011, while earnings have lagged
Consider this: Since the beginning of 2011 the S&P 500 has risen by more than 60%. On the contrary, aggregate GAAP earnings of the companies included in the index have actually dropped, while Non-GAAP income (a measure that generally smoothes GAAP earnings for extraordinary items) expanded by a mere 10%. Consequently, the benchmark’s overall Price-to-Earnings ratio (P/E) has risen sharply from 14.5x at the end of 2011 to 23.6x today, a level at the upper range of historical values.
Keeping this in mind and thinking about the S&P 500 going forward, we try to shed some light on the current earnings season for the first quarter of the year. According to estimates from Thomson Reuters Q1 earnings are expected to drop by 6.9% (1.8% excluding the energy sector) compared to the same period one year ago. This would mark the fourth consecutive quarter of declining earnings since the aftermath of the financial crisis. It is probably fair to state that although the broader US economy is moderately growing, corporate earnings are facing a recession.
Interestingly, weakening earnings have even started to affect sectors that have sustained growth in the recent past such as for example the health care space. According to Factset, the latter group has already issued negative earnings guidance in 17 cases. The broader picture offers no more reason for complacency. Factset reports that a total of 94 S&P 500 firms have warned that their EPS might miss analyst consensus estimates, the second highest level over the past 10 years.
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