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Saturday, October 16, 2021

Baked in Q-2 Earnings are Off, the Stock Market Will Continue North


The S&P 500 is cheaper than many think, meaning more profitable.

The stock market is cheaper and profitability is better than the pundits would have us believe.

The deep dive baked into Q-2 consensus earnings understates the real core earnings of many US companies.

Here I show where there is Northside in the overall S&P 500 and in individual stocks.

Chart 1 shows the steep fall expected in consensus estimates for S&P Global’s (SPGI) operating earnings compared to our more normal core earnings.

Specifically, the trailing-12-month (TTM) core earnings for the S&P 500 show a 2% fall since Y 2019 while consensus predict a 22% fall.

Chart 2 further demonstrates the more normal and reliable nature of our core earnings compared to S&P Global’s (SPGI) operating earnings over a longer term, including the Y 2008 financial crisis.

Investors would be well-served to tune out the noise in SPGI’s operating earnings metrics, especially when it comes to valuation, as shown in Charts 3 and 4.

Most investors know that GAAP earnings are prone to earnings distortion because they include unknown amounts of unusual items.

But, most investors are not aware that legacy metrics like Wall Street earnings from Refinitive and operating earnings from SPGI miss nearly $0.45 of every $1.00 of the unusual gains and losses. 

New research shows that most analysts are not efficient in incorporating the implications of non-core earnings in their earnings forecasts.

As seen in Chart 3, analyzing the P/E ratio of the S&P 500 based on core earnings shows how much investors oversold in March and that, despite the recent rebound, the S&P 500 remains very reasonably valued compared to the past few years.

Valuing the S&P based on SPGI’s operating earnings suggests the market is more highly valued than any time since the Y 2008 financial crisis.

Nevertheless we believe there is Northside left in this stock market.

 Chart 4 shows the clear buying signal provided by the P/E based on core earnings data during the market crash in the Y 2008 financial crisis.

The research presents a similar buying opportunity in the current spiking of the P/E of the S&P 500 based on SPGI’s operating earnings compared to the P/E based on core earnings.

Let’s make some Money!

Passive investing has become a very crowded trade, so now is the time in many, many years for investors to pick individual stocks, especially those armed with differentiated insight into earnings.

You can see our picks daily on HeffX-LTN’s stock reports.

We recommend investors consider putting money into these stocks and believe they have even more Northside potential than the S&P 500 alone.

Have a healthy day, Keep the Faith!

Paul Ebeling
Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he is the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.   

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