Credit Markets and the Forward Earnings Curve

Sourcing Bloomberg / Barclays data, are the YTD returns for the bond market asset classes as of Friday, April 12th, 2019:

  • US Corp HiGrade: +5.13%
  • US Corp High Yld: +8.14%
  • Mortgages (MBS): +1.89%
  • Municipals: +2,67%
  • US Treas: +1.32%
  • US TIPS: +2.85%
  • Global Sov’rn: +1.03%
  • Emerging Mkts: +5.41%

Charlie Bilello of Pension Partners mentioned several times last year that the 2017 and 2018 were the worst two years for the US bond market since the early 1980’s, 1980 and 1981 I thought he referenced.

We’ve seen a nice bounce back in credit markets already in 2019, and I think this portends well for the US stock market and the SP 500.

That’s a nice YTD return for high yield for 2019.

Clients have been told to expect an all-time-high in the SP 500 as long as credit remains healthy.

Have to say, I’m still shocked at the negative sentiment around the stock market too. Investors are scared to death and pundits seem overly bearish. The residue of 2008.


The Forward Earnings Curve for the SP 500: 

About 10 days ago I/B/E/S by Refinitiv published the “SP 500 2020 bottom-up estimates” which gives us a look 7 – 8 quarters out.

Here is a quick analysis of the numbers:


click to enhance / enlarge


In 2019, at least through the first 3 quarters, investors lap the strong y/y growth in SP 500 earnings, much of it aided by the tax cut. I should keep reminding readers that SP 500 earnings grew 23% last year – 14% if we consider just “organic” growth and remove the tax cut impact per Factset – but the SP 500 fell 4.35% in calendar ’18, and now in 2019, SP 500 earnings are currently expecting a 3% – 4% annual growth (I think that’s too low) and already the SP 500 is up 15% YTD.

PE contraction vs PE expansion – it continues to wreak havoc with forecasts and opinions.

Note however, 2020 bottom-up estimates and expected growth next year: does the SP 500 look out that far ? Sure, look back at ’07, the SP 500 peaked 11 months prior to the Lehman default.

Summary / conclusion: Only David Templeton of Horan Capital Advisors (@HoranCapitalADV) and Cam Hui, of Humble Student of the Markets (@HumbleStudent) have ever taken the time to note the importance of beyond the current calendar year for SP 500 earnings estimates. Here was a timely blog post in May, 2016, and then again our forecast for 2017 which was pretty accurate based on historical earnings data. Here is the downside of forecasting though: sometimes the numbers just don’t lineup to give you the confidence for a forecast. You still try and provide a forecast, as this blog did for 2019 but the forecast called for a “low double-digit” return for the SP 500 at the high end, and we’ve already blown through that.

The credit markets still look healthy and with the Fed on hold, it could be a good year for the credit, fixed-income segments and that should continue to portend positively for US stocks.

Don’t complicate what maybe doesn’t need to be complicated.

Thanks for reading…



2 Responses to “Credit Markets and the Forward Earnings Curve”

  1. Mark

    Any thoughts on the WFC guidance?

    • Brian Gilmartin

      will check the estimates in a few days, Mark. The stock reaction on an otherwise strong day for Financials, tells you everything.


Leave a Reply