{"id":6433,"date":"2016-11-12T16:14:34","date_gmt":"2016-11-12T16:14:34","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=6433"},"modified":"2016-11-12T16:14:48","modified_gmt":"2016-11-12T16:14:48","slug":"q4-16-earnings-now-less-important-next-12-months-could-be-more-about-pe-expansion","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=6433","title":{"rendered":"Q4 ’16 Earnings Now Less Important – Next 12 Months Could be more About P\/E Expansion"},"content":{"rendered":"

Per Thomson Reuters, with 455 of the SP 500 having already reported their Q3 ’16 financial results, SP 500 earnings have grown 4.1% year-over-year, while excluding Energy, the SP 500 earnings have grown +7.7%.<\/p>\n

This is pretty good earnings growth – well above what the Street was expecting.<\/p>\n

On October 2nd, readers of this blog were told to expect this<\/a>,\u00a0but actual results have been slightly stronger for Q3 ’16, with the bigger retailers expected to report this week.<\/p>\n

The 3rd quarter, 2016 earnings season will unofficially end with Walmart’s earnings release scheduled for this coming Thursday morning, November 17th, before the market open.<\/p>\n

Here is the thing though: as readers could tell from the market action this week – actual earnings reports for Q4 ’16 – take on much less importance than the fiscal policy and Republican reform agenda that will surely follow in the next 90 – 100 days.<\/p>\n

The SP 500 ended 2014 – 12\/31\/14 – at 2,059. The SP 500 closed on Friday, November 11th at 2,164, for a 5% increase over a 23 month time frame.<\/p>\n

The SP 500 has essentially been flat, trading around the “2,000” print going on two years now.<\/p>\n

The point of this lesson being that with the collapse in crude oil and the Energy sector, SP 500 earnings have been flat for 2 years, and if we exclude Energy, SP 500 earnings have grown about 4% – 5% over the last 2 years, pretty much inline with the return on the SP 500.<\/p>\n

In other words, the SP 500 has pretty much walked up the chart with the degree of “Ex-Energy” earnings growth. There has been little P\/E expansion, and on occasion, P\/E contraction.<\/p>\n

That could change now: without getting into the politics of the last election, the Republican’s are likely to follow their typical, “pro-business” agenda, which COULD mean corporate tax reform, a lowering of individual tax rates for all Americans, and the already-commented upon reform of Dodd-Frank, and the Affordable Care Act.<\/p>\n

We saw some knee-jerk reactions last week in the Sp 500 with Financials and Industrials now dramatically overbought (per the Bespoke Report).<\/p>\n

Biotech has its best week ever – and the thing is NONE of this is earnings-related, yet.<\/p>\n

I do think we are entering a period over the next 90 – 180 days that will be more “macro” over “micro” (i.e. individual company-driven) and that makes investing much harder for stock pickers.<\/p>\n

Sector ETF’s and the various indices might be better investment vehicles over the next 3 – 6 months to play specific macro themes (less regulation, Financials, auto’s, or less government support i.e. Solar, and the potential loss of the tax credits, etc.)<\/p>\n

The point of all this is that I will continue to update the SP 500 earnings data every week, but I do think watching nuanced changes in sector growth will be less telling in the near term.<\/p>\n

Watch that “forward 4-quarter estimate” though – this metric will take on more importance after the results of Tuesday night, November 8th, 2016.<\/p>\n

————————–<\/p>\n

Thomson Reuters data by the numbers:<\/p>\n