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Tags: analysts | stock | investors | markets

A More Sober Perspective From the Analysts

Dr. Edward Yardeni By Wednesday, 16 December 2015 07:05 AM Current | Bio | Archive

Investors will be focusing on the FOMC statement and Fed Chair Janet Yellen’s press conference. That’s been the focus since the last FOMC meeting on October 27-28. Of course, investors always focus on the Fed, though they seem to have been doing so much more than ever before during the current bull market.
Meanwhile, industry analysts continue to focus on the prospects for the revenues and earnings of their companies. They tend to be less influenced than investors by the headline news on monetary policy and other macroeconomic developments. Their analysis tends to be bottom up rather than top down.
This year’s volatility in the stock market seems to be more driven by top-down developments rather than bottom-up events. I wouldn’t be surprised if some investors have been driven to have a stiff drink at the end of some of the more volatile days. A more sober perspective has been provided by industry analysts. In other words, “bottom-up” analysis is a good alternative to “bottoms-up” investing. The analysts’ latest assessments remain relatively upbeat and constructive for the bull market in stocks.

Let’s see what the analysts are saying:
(1) Looking forward. Previously, Joe and I have observed that their S&P 500 forward revenues estimate tends to be a coincident indicator of S&P 500 sales. The former is available weekly using the time-weighted average of analysts’ forecasts for this year and next year, while the latter is available quarterly.
Interestingly, S&P 500 forward earnings tends to be more of a year-ahead leading indicator of actual S&P 500 earnings. However, analysts fail to see earnings recessions coming. The big miss seems to be in the profit margin, which seems to fall faster than they anticipate when recessions occur. To be fair, economists generally don’t see economic recessions coming either.
In any event, if a recession isn’t likely in the coming year, then odds are that the analysts’ outlook for both revenues and earnings has a good chance of playing out. They are relatively optimistic on both counts.
(2) S&P 500/400/600 forward revenues. Interestingly, the plunge in oil prices took a much bigger bite out of S&P 500 forward revenues than out of the SMidCaps late last year and early this year. The former has been recovering since the spring, although oil prices remain under pressure. The upturn in S&P 500 forward revenues is especially impressive given the strength of the dollar since the summer of 2014.
While S&P 500 forward revenues remains below last year’s record high during the week of October 9, 2014, the comparable SMidCap measures have moved into record-high territory over the past few weeks through early December. The projected annual revenue growth rates for 2016 and 2017 are in the mid-single digits: S&P 500 (4.1%, 6.0%), S&P 400 (5.1, 5.0), and S&P 600 (5.4, 6.1).
(3) Business sales. Not surprisingly, the growth rate of S&P 500 revenues per share is very highly correlated with the growth rate in manufacturing and trade sales. Actually, it is a bit surprising since this measure of business sales includes goods but not services. In addition, while exports of goods are included in business sales, about half of S&P 500 revenues are from sales abroad.
In any event, S&P 500 revenues fell 3.2% y/y during Q3. Business sales declined by 2.7% y/y through October. The weakness in both was mostly attributable to the drop in oil prices. To assess the impact on the S&P 500, Joe reduced the aggregate revenues of the S&P 500 by its Energy sector. This series shows a gain of 1.5% y/y through Q3. Business sales excluding petroleum products rose 1.1% y/y through October.
By the way, while we are on the subject, data available through September show that inflation-adjusted business sales jumped 1.3% m/m and 4.0% y/y to a new record high. The real inventory-to-sales ratio has been on a gradually rising trendline since mid-2010. Debbie and I believe that some of this year’s rise can be attributed to record petroleum stockpiles.
(4) Sector forward revenues. The forward revenues outlook is relatively upbeat across the 10 sectors of the S&P 500 with the obvious exceptions of Energy and Materials. In record-high territory are forward revenues for Consumer Discretionary, Health Care, Industrials, and Information Technology. The latest revenues growth forecasts are relatively solid for next year: Health Care (7.8%), Telecom Services (7.0), Consumer Discretionary (6.0), S&P 500 (4.1), Consumer Staples (4.0), IT (3.4), Financials (3.0), Materials (2.9), Utilities (2.8), Industrials (2.0), and Energy (0.6).
(5) S&P 500/400/600 foward earnings. There hasn’t been any growth in the forward earnings of the S&P 500/400/600 on a y/y basis mostly because of the adverse impact of plunging oil prices on the earnings of the Energy sectors in these three market-cap composites. The good news is that this performance reflects a dip in all three late last year and early this year and a recovery back to last summer’s record highs.
Again, Joe’s slice-and-dice of aggregate trailing four-quarter S&P 500 earnings shows a drop of 14.7% y/y for the total, but a 2.3% gain excluding Energy (Fig. 10). Joe did a similar analysis for the aggregate forward earnings data for the S&P 500 compiled by Thomson Reuters. It remained on a solid uptrend and in record territory last month. On a y/y basis, it was up 4.7% excluding Energy, and down 1.2% in total.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.

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If a recession isn’t likely in the coming year, then odds are that the analysts’ outlook for both revenues and earnings has a good chance of playing out. They are relatively optimistic on both counts.
analysts, stock, investors, markets
Wednesday, 16 December 2015 07:05 AM
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