This article from Hedgeye is all about the change in the rate of change – the second differential that I continuously talk about.
The result is not the key as much as how the result changes from prior results and expectations.
Many are very bullish on this market due to the projected increase in earnings from good fundamentals, tax cuts, etc.
Those high earnings estimates from the majority of the prominent Wall Street analysts are probably reflected in current prices.
To go up, in my opinion, the actual earnings must beat the projected earnings – again, change in the rate of change.
The market is effectively expecting great earnings, so great earnings will keep the market where it is. Really great earnings will push the market up further. Anything less than great earnings has the risk of causing a continued pullback.
The high earnings estimates have set a high hurdle for the market to clear.
Earnings Estimates Sky High: What’s Wall Street Smoking?
Wall Street has really outdone itself this time. Earnings expectations for the first quarter of 2018 are currently sitting at levels not seen in 7 years.
It’s sad but true: Market strategists tend to make forecasts by taking recent memory, applying some added growth rate then extrapolating that into the future.
So here’s the latest, if Wall Street’s estimate of 16.5% ends up being the final growth rate for the first quarter, it would be the highest earnings growth for the S&P 500 since Q1 2011 (19.5%). Furthermore, the “comp,” against which 1Q 2018 earnings must exceed to realize any growth, was up +14.1% in 1Q 2017. That’s a high bar for the first quarter to beat. And the tough comps continue throughout the year.
Is the peak in earnings growth in? It’s likely, especially considering we’re modeling slowing GDP growth into the back half of 2018.
To be sure, there are some difficult-to-model events, like tax reform, which could goose the numbers. But any estimate of tax reform’s impact on corporate profits is purely qualitative. Therefore Wall Street’s swollen estimates have dubious value at best.
… But THIS Takes the Cake
After questioning the U.S. growth acceleration for the past 6 quarters, from the 2Q 2016 lows in year-over-year GDP (1.3%) to 4Q 2017’s 2.6%, we think Wall Street is now missing peaking U.S. GDP growth.
Hence some rather ridiculous estimates for the year-end price of the S&P 500. Here’s FactSet:
“Industry analysts in aggregate predict the S&P 500 will see a 16.2% increase in price over the next twelve months. This percentage is based on the difference between the bottom-up target price and the closing price for the index as of yesterday (April 5). The bottom-up target price is calculated by aggregating the median target price estimates (based on company-level estimates submitted by industry analysts) for all the companies in the index. On April 5, the bottom-up target price for the S&P 500 was 3094.05, which was 16.2% above the closing price of 2662.84.”