As we head into earnings seasons, what can we expect from the markets, which are sitting near all-time highs?
Dan Morris is global investment strategist at TIAA-CREF, a financial services company with over $569 billion in assets under management. In an interview with “Talking Numbers,”Morris discusses his take on earnings and the market’s current valuation.
According to Morris, the market’s valuation relative to its earnings is quite above historic averages. However, when the inflation rate is below 3 percent, the average price-to-earnings multiple is 16 times earnings, close to current levels.
“We don’t see a threat to the market based purely on the basis of valuations,” he said. “The average or median value over the last, say, 40 or 50 years… does seem a bit high. The averages run about 14 times [earnings]. We’re about 17 now. But, what’s different today compared to the past is that we have very low inflation which is supporting equities that supports a higher multiple than they would normally see.”
Morris also says that forecasted earnings growth of 10 percent over next year should equate to a market appreciation assuming no change in multiple. “Companies have tended to under-promise” with its earnings forecasts, he said. “But, when you look at the actual results, they’ve been decently positive.”
Earnings surprises will continue, said Morris. “If we repeat that – and we think we will – we’re probably going to find that in the end, despite the uncertainty, we’re probably going to come up with decent numbers,” he said. “That’s going to support [earnings] and that’s going to support the valuation.”
And, while volatility has shrunk, with the CBOE Volatility Index (the VIX) recently trading near seven-year lows, Morris sees that potentially changing. But, that may not be a bad thing, depending on the reasons for that volatility.
“There’s going to be two sources of volatility,” Morris said. “Depending on what the source is, we think it will be an opportunity to buy into the markets since we like the fundamentals.”
Should the volatility come from earnings disappointments, a scenario Morris doesn’t expect but is possible, then that could hurt the long-term valuation of the market. But, if there’s volatility because of, say, temporary geopolitical flare-ups, “that tends to not really affect the fundamentals,” he said. “If that drive prices down temporarily, we would see that as an opportunity to move more into the market. “
To see the full interview with Dan Morris on the market’s valuation, watch the above video.
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