S&P 500 price-earnings climbs

By Colin Twiggs
August 9st, 2016 4:30 a.m. EDT/6:30 p.m. AEST

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This is a follow-up on my July 7th newsletter where I concluded:

"What we are waiting for is earnings to recover at a faster rate than the S&P 500 Index...... earnings growth outstripped index growth ahead of each of the last three bull markets."

The Price-Earnings ratio (PE) for S&P 500 stocks has now climbed to 24.06 based on As Reported earnings over the last 4 quarters, with 86.2% of companies having reported. The graph below shows quarterly earnings slowly recovering, with June quarter displaying a modest increase compared to the same quarter in 2015. But the index is climbing at a faster rate than earnings. Any PE over 20 is normally considered over-priced and ripe for a correction; so this should be cause for concern.

S&P 500 PE and Earnings

Forward PE, based on forecast earnings over the next four quarters, however, is clearly declining. Standard & Poors are forecasting strong earnings growth over the next year, with quarterly earnings reaching $30.00 by June 2017.

S&P 500 Forward PE and Earnings

High index prices are premised on strong earnings growth but this does not allow much wiggle room for earnings misses. We need to beware if index growth continues to outpace earnings.

With low GDP growth and average hourly earnings in the private sector starting to recover, companies will have a tough time maintaining meaningful earnings growth.

Average Hourly Earnings of All Employees: Total Private

"We don't care. We don't have to. We're the phone company."

~ Lily Tomlin.