Bigger Picture on SP 500 Earnings and the PIMCO Emerging Markets Call

With 95% of the SP 500 having reported Q4 ’15 earnings, for full-year 2015, SP 500 earnings growth is expected to come it at -1%.

The forward four-quarter estimate for 2016 is projecting +1.3%.

There is your issue with the stock market: basically flat earnings growth for a 24 month time horizon.

I’ve written about it before here, but flat earnings growth over 2 years is a “P.E compressing” event for sure.

Although I wrote back in mid-December here that we should expect 10% on the SP 500 in 2016, while waffling the last few weeks for sure, the forecast remains.

The SP 500 closed on 12/31/15 at 2043. A 10% gain would leave the SP 500 at roughly 2,247 by year-end 2016.

Investors need to see earnings growth from the SP 500. That is the missing ingredient.



PIMCO’s Emerging Market’s (EM) call, saying that it was the “Trade of the Decade” is a gutsy call.

In 2016 so far, the sectors and asset classes that were crushed in 2015 have bounced sharply in the new year. Emerging Markets is one of those asset classes that looks to be starting to base.

Here is a spreadsheet compiled this week on a couple of ETF’s: Emerging Markets Spreadsheet

Although somewhat crude and elementary (the spreadsheet that is), the two largest concentrations in most EM ETF’s is China and Financial’s, and those groups are probably not mutually exclusive. Also, look at the return data: the ETF’s are just barely positive for 10-year time frames even though the asset class had stellar returns last decade, from 2000 to 2007. Currency is supremely important to the EM’s, so I’d like to see the dollar index (DXY) remain under 100 and gradually weaken over time. The DXY has not made a new high since March, 2015, which – all other things being equal – should continue to at least not be a headwind for the asset class.

Investors can and perhaps should own Emerging Market ETF’s simply from a reversion-to-the-mean perspective.

The EM ETF’s and some Energy ETF’s were bought for some clients last fall, as the US markets ramped off the China low in August ’15. Client positions can change anytime, but this is the first time clients have owned EM ETF’s ever, or maybe a better way to say it is that this is the first time I’ve ever bought the asset class for clients. One reason the asset class was added fund flows as detailed by this CNBC video from October, 2015. Also this article from the Wall Street Journal in late August, 2015 highlighted the perfect storm that was hitting the emerging markets.

Conclusion: The “dash-to-trash” or what could more politely be called the reversion-to-the-mean trade that has started in 2016 has started to stabilize Emerging Markets and Energy. Clients now have exposure to both EM’s and Energy via the ETF’s (VWO, EEM, IYE, XLE). Emerging Markets have been out-of-favor for years, and the risk-reward could be compelling depending on your risk profile, etc. I would like to see the US dollar continue to gradually weaken over time, but if commodity prices can stabilize, and if they can find traction and become sustainable (crude oil, gold, grain prices, copper, etc.) might provide that tailwind the EM’s have been looking for the last few years. My own opinion is that the EM trade could take time to unfold, but ultimately, PIMCO is correct. EM’s may not be the “trade of the decade” but they could offer some nice upside in turbulent markets given the absolute drubbing they’ve taken the last 3 years.

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