What changed? Nick Raich from The Earnings Scout said the global growth narrative changed, due mostly to central banks. "First, the Fed backed off," Raich told me. "Then everyone realized that China was stabilizing, Europe was not as bad as feared, the U.S. economy was still strong, and the analysts had cut their numbers too much."Because analysts cut earnings estimates too drastically, companies are beating estimates by far greater amounts than normal.
Analysts have modestly trimmed second-quarter earnings, now expected to be up 1.7%, and Q3 up 2.0%. Fourth quarter estimates of 8.5% growth have been left largely unchanged. As of now, 2019 will likely see modest mid-single digit gains in earnings, well below 2018 torrid earnings growth of above 20 percent, but still respectable.
The big problem for the markets now is valuation. Stocks are pricey, trading at around 17.1 times forward earnings, well above the historic average of 15 to 16 times forward earnings. Even if you take 2020 earnings estimates, the S&P 500 is trading at a roughly 15.5 multiple, near the historic average.
Bottom line: A lot of things are going to have to go right in the global economy to justify these prices. There is very little room for error.
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