Yearning for EarningsMay 20, 2020 -
Categorized in: IAG News
Companies that earn profits are more desirable to own than those that don’t. That seems easy enough.
The real question is how early before profitability are you willing to own a company? Many companies lose money for years before they either gain traction or succumb to failure. Even companies like Apple and Microsoft were once floundering startups that faced numerous life-threatening challenges along the way to becoming global successes.
The current economic reshuffling makes it even harder to predict future earnings for companies big and small, and thousands of stock analysts are paid to calculate those predictions every day.
The collective wisdom of these analysts indicates that future earnings for companies included in the S&P 500 Index have declined significantly since late February. This is not surprising given the massive disruption to consumers and businesses caused by COVID-19.
According to JPMorgan, analysts’ consensus is that earnings for S&P 500 companies over the next 12 months have declined by 22% since February 21. Every single week for the last 12 weeks analysts have trimmed their future earnings expectations.
With future earnings estimates down by 22%, as of May 19 the S&P 500 Index rested only 14% below its record high on February 19. This combination of lower earnings and less lower prices leaves the next twelve month price to earnings (P/E) ratio at just over 20 — higher than it has been at any point in the last 5 years.
Clearly traders are optimistic that additional earnings beyond those currently anticipated by analysts will appear over the next twelve months. If company earnings (E) rise in the future, today’s prices (P) are fully justified. If future Earnings do not recover as quickly as traders expect, stock Prices will likely dip until future Earnings expectations start to rise again.
We live in very uncertain times where rules and norms are changing every day. Companies that adapt to this new reality quickly or fill newly created needs are likely to earn profits sooner than those that are anchored to the past.
Consumers and businesses will elect those winning companies by voting with their dollars in the coming months. Until then, we expect choppy financial markets as traders continue yearning for earnings.
Quote of the week: Charles R. Swindoll “Life is 10% what happens to you and 90% how you react to it.”
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