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Is FOMO Really Driving the Current Rally in the S&P 500 or is it Earnings?

Apr 24, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

 

  • Wall Street strategists are out arguing today that FOMO, or Fear of Missing Out, is driving the current rally in US stocks.  We couldn’t disagree more!

 

S&P 500 Index 3-Year Price Chart

 

  • Heading into 1Q, earnings estimates for the current earnings season had been cut from expectations for POSITIVE 2.8% growth to NEGATIVE 4.1% growth
     
  • 2Q estimates were expected to fall little under 1% after starting the year at POSITIVE 3.3%
     
  • Remember that we highlighted that analysts/strategists slashed estimates by the largest amount (%) in 3 years!
     
  • What is the takeaway here?  Maybe that Next 12-months P/E of the S&P 500 is simply inflated because earnings estimates were cut too much?

 

S&P 500 Index 3-Year NTM P/E Chart

 

  • Just as an exercise, let’s say the next 12-month EPS is revised upwards 5% to compensate for overreaction by Wall Street analysts, the Next 12-months P/E for the S&P 500 would be 16.1x
     
  • That is in-line with the 5-year average for the S&P 500
     
  • Our conclusion is that it is ALWAYs earnings expectations that drive stocks rallies

 

 

 

 

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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS