Image Source: PexelsThe earnings per share ratio for the S&P 500 over the next four quarters (as shown in blue) was estimated to come in at about $271.24, while actual reported EPS in the last four quarters has come in at approximately $244.89 thus far. Both of these readings are at or near record highs.
Reported earnings have grown 10% over the last four quarters, while the market is pricing in about 11% growth in earnings over the next four quarters.We know that the formula for stock market returns is: earnings growth + dividend yield + change in valuation. So, the earnings growth part of the equation seems to be on solid footing.About 60% of the S&P 500 has now reported Q4 results. Some notable factors include the following:
The forward PE ratio is now at 22.2x, which is about 31% above the historical average (as shown by the red line).
With the rise in interest rates, the bulls no longer have TINA (‘There Is No Alternative’) on their side. The above chart shows the S&P 500 earnings yield is now slightly below the yield on fixed income (as shown in blue). With the added volatility of stocks relative to bonds, this leaves fixed income as more attractive from strictly a valuation basis at recent levels.
Shown another way, the equity risk premium (S&P 500 earnings yield minus the interest rate on 10-year Treasuries) is negative for the first time in about 20 years.When it comes to fundamental analysis, I see these three factors as the pillars to consider:
The first two have remained in reasonably good shape. The third pillar, however, has been kicked out. It doesn’t mean that the house will collapse over one pillar, but it does mean that the foundation isn’t as stable. Valuation, as we know, is a terrible timing tool — especially if we continue to get double digit earnings growth and a healthy beat rate.More By This Author:Spike In Inflation Expectations Causes Sentiment To Dip For The 2nd Straight Month Amazon Earnings Breakdown Despite The Miss On January Jobs Gains, The Details Under The Surface Were Strong
