MIND THE GAP – Equity prices way up but future corporate earnings way down
It is official now; the S&P 500 market index broke its record of 3,025 to reach 3,093 last Friday, November 8th, 2019. So far this year 2019, the index has accumulated +23% year to date.
If we compare its performance of S&P 500 with its 2018 highest point of 2,929 on September 17th, 2018, the S&P 500 will be up just +6.15%, which is very close to the long term yearly average return of the index.
A quick update of the third-quarter financial reports of 2019, according to FactSet article from John Butters, about 89% of S&P 500 U.S. companies have reported Q3 2019 results, on aggregated companies' revenues grew +3.2%, and earnings shrink (-2.4%) year over year vs. Q3 2018. It is not exactly a quarter to cheer on.
The analyst has already cut estimates revenues and earnings for the next Q4 2019, and they expect another negative quarter; if this happens, it will be the fourth quarter of negative earnings growth in a row. The 2020 earnings estimates of the S&P 500 index for Q1 2020 and Q2 2020 were lowered to a single-digit earnings growth ( ~5% and-7%), definitely a brighter outlook than 2019, but these estimates may continue to be adjusted.
As Mr. Ray Dalio, the famous Bridgewater Hedge Fund manager, just recently explained, “we are in pushing on a string dynamic, as every asset price goes way up the future expected returns go way down, while economic growth and inflation remain sluggish.”
The expected resolution to the U.S. – China trade dispute, the possible definition of Brexit, and the unwavering support of U.S., Europe, and Japan central banks have raised market psychology to push the market rally higher.
Nowadays, investors believe 2020 will look better than 2019, and that we may be in an inflection point toward new earning growth cycle. In spite of the fact that most recent economic indicators in Europe and Asia are weak, and U.S. economic indicators have a slowdown in the last quarters but are still growing.
The investors have to “Mind the Gap” between equity market ever higher prices and companies slower growth, the risks of those pricey assets have increased considerably. So what should be the behavior of a rational investor? How investors can maximize profits and minimize risks?. Those are the questions investors should ask, and more when conditions are worsening.
Meanwhile, it is healthy to carefully review your exposure to the different asset classes and re balance accordingly to keep your strategy in line with your risks and long term investment plan. You may reach me at any time.
Last week - November 4th to 8th, the Standard and Poor’s 500 market index was up +0.51%. The emerging markets' equity ended down -0.44% (using IEMG), and the developed markets equity indexes up +0.20% (using VEA). The U.S. oil price WTI closed at 56.9 USD per barrel last week. The gold price ended the week at 1,464 USD per ounce.
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Have a productive week!