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'Like a red herring': Why one CIO says earnings are irrelevant this year

Ameya Pendse

Earnings season is about to heat up as the big banks — J.P. Morgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) — report their Q3 financial results on Tuesday. But as Wall Street fixates its eyes on earnings over the next few weeks, one CIO says they won’t have a long-term impact.

“Any discussion about earnings is quite like a red herring,” Sandip Bhagat, chief investment officer of Whittier Trust told Yahoo Finance’s YFi AM. “It’s almost moot and irrelevant.”

Bhagat says 2019 will see virtually no earnings growth for the full year, noting we already had a shallow earnings recession in the first half of 2019.

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“The first two quarters had slightly negative earnings growth,” Bhagat said. “Technically that is a recession — two consecutive quarters of negative growth. And yet, the market has just raced through that and we’re up almost 20%.”

“So the market has not focused on the earnings season,” Bhagat added. “In 2019, earnings growth with be zero. Earnings are not the focus in the market.”

2020 matters

While Bhagat affirms that earnings don’t matter in 2019, he says they will be important in 2020. 2019 is about valuations, not earnings, he says.

“We were able to get away with zero earnings growth this year, because valuations have become so depressed,” Bhagat explained.

When it comes to valuations, Bhagat says we’re seeing an expansion of the price/earnings multiple.

“Remember that sharp sell-off in December of last year? That left the market in at a forward PE of 13.5 times. Today we trade at 16.5, you do that arithmetic, this year’s market gains have been all about the expansion of the market multiple, and valuations being restored to more normal levels. Valuations are full now, so the burden will switch to earnings going forward. But that’s a story for 2020.”

A version of this article was originally published on Oct. 9, 2019.

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