$DIA, $SPY, $QQQ, $RUTX
Stocks finished higher on the week, and wrapped up a disappointing month and year. The S&P 500 is off 7% in Y 2018 after peaking with a 10% YTD gainer in late September prior to the consolidation.
The Fed’s tightening and heightened uncertainty into Y 2019 have brought valuations on the S&P 500 to multi-year lows as investors anticipated slowing growth next year.
The extreme volatility of late increased expectations for a recession on the horizon as the current cycle enters its 10th year.
A lack of liquidity during holiday trade exacerbated recent swings, while there was little information about corporate developments.
That will change in January
So, expect to see lots of pre-announcements for Q-4 and early outlooks for Y 2019.
According to FactSet, S&P 500 EPS are expected to grow 20.6% this year. While tax cuts have provided tailwind, earnings before interest expense and tax (EBIT) are still expected to grow an impressive 11.6%.
Plus, Earnings for Q-4 are currently expected to grow by 12.5%.
Strange, but the focus turned to Y 2019 some months ago, and concerns over slowing growth have weighed on the market.
Earnings are expected to grow a still healthy 7.7% next year, but that is down from 9% in early November as Q-3 earnings season wound down.
Estimates for double-digit earnings growth have proven optimistic during this economic cycle. The last 2 years were the exception under the business-friendly Trump Administration, but the headlines elevated uncertainty and extra risk to forecasts for Y 2019.
In the coming weeks we will know what’s really happening when companies unveil their forecasts for next year.
Key retailers will provide an update on how the all-important Holiday season went starting on Thursday, 3 January and thereafter.
Christmas Holiday sales were really strong as the US consumer remaines strong.
MasterCard Spending Pulse reported Christmas Holiday sales up 4.9% earlier this week, with online sales up 18%.
For the Key retailers, focus will be on EPS as investors want to see companies profit from the favorable environment, as the shift to e-Commerce may have weighed on margins.
Corporate guidance picks up in earnest starting in the 2nd week of January when the extended Holiday shopping frame comes to an end. After the pre-announcements, earnings season will kick off during the 3rd week of January.
The Securities and Exchange Commission now allows companies a larger window to file their annual reports relative to Quarterly updates. So, we will see pre-announcements throughout January and Q-4 earnings season run into March.
Companies will strive to keep investors abreast on how Y 2018 wrapped allowing management to report official numbers for the year while gaining additional clarity for Y 2019 going forward.
The Big Picture
Some see slowing growth overseas and here in the US, tighter monetary policy from the Fed, political instability and trade uncertainty, all of that headline junk weighed on stocks since late September.
Capital IQ’s data says that the S&P 500 trades at 15.8X 2018 earnings estimates, 14.8X earnings estimates for the next twelve months and 14.4X 2019 earnings estimates. That is near 5-year lows and a discount to the 30-year average of just under 17X.
The consumer discretionary sector is the most expensive sector at 18.5X forward 12-month earnings estimates, followed by consumer staples at 16.9X and utilities at 16.6X.
The financial sector is by far the cheapest relative to earnings at 10.5X, followed by energy at 13.6X and industrials at 13.7X. Expect them to lead the next leg of this Bull Market.
Trade, economic data and the Fed’s reaction to economic developments remain Key element in the outlook for Y 2019, investors will find clarity in the perspective from corporate america in the coming weeks and months.
The facts, not headline fears will drive the markets in Y 2019.
Have a Happy New Year!
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