Are Earnings Firing A Warning Shot To The Bulls?

July 22, 2014 10:05 AM

The SPX is currently making another new all-time high and (right or wrong) many of the overseas fears have been removed thanks to a strong earnings season so far.  Driving the gains is the fact revenue has been great this quarter, a pleasant change from the past few years.

Thanks to earnings data from my pal Brian Gilmartin, check out the chart below.  Earnings continue to move higher, confirming the new highs in the SPX.  Not much wrong with this picture.  BTW, if you aren’t reading Brian’s blog you are missing out, no one is better at putting a real world look at what earnings are doing and how they matter.  

That chart above looks pretty correlated and you’d be right, as earnings and the SPX sport a 91% correlation.  

So is it really that simple?  Earnings matter, absolutely, as they drive longer-term trends.  Still, in the near-term, anything can honestly happen.

With some more data from Brian, check out the year-over-year earnings growth and the SPX annual returns.  You’ll find some years had good earnings growth with poor SPX returns, and vice versa.  My favorite example is last year gained just 5% earnings growth, but the SPX soared 30%.  It gained a similar 6% earnings growth in 2002 and the SPX tanked 22%.  

Using the 2014 estimate of total SPX earnings of $117.41, the SPX sports a P/E ratio of 16.8.  Going back to 1985, the average P/E has been 17.9.  Yes, the 1990s were an outlier, still the chart below is worth sharing.  Maybe things aren’t as stretched as most think?  

Earnings are just a part of it to me.  Paying attention to the technicals and sentiment also matter.  When you add it all up, I continue to think things look good for the bulls here.  

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