Earnings Season Begins

Earnings season begings in earnest this week, with several majors reporting. There’s a nice preview at the public site of the WSJ:

TUES Jan 16

WEDS Jan. 17
J.P. Morgan Chase & Co. & Washington Mutual
AMR Corp. & Southwest Airlines

THURS, Jan. 18
Merrill Lynch

FRI, Jan. 19
General Electric

I came across three very interesting but different issues relative to earnings season: The first was via Birinyi Associates, who looked at market performance relative to whether we were in or out of "Earnings Season" over the past 17 quarters.

As the chart and 1st table below shows, markets seem to do better off season than on:



The second was from Morningstar, who evaluated each S&P sector to determine relative valuation. Energy was the only sector they determined to be beow fair value.


One thing worth noting: Stocks stend to swing way above and below fair value . . .


Lastly, something stood out in today’s WSJ which I need to investigate further. The Journal noted that:

"According to both Thomson and Reuters, the S&P 500 is trading at less than 15 times this year’s expected earnings, which is cheap compared with long-term averages of about 20 times earnings."

Long term average of 20 forward P/E? That sounds awfully high. I need to look into the source of that, including whatever period it covers. My guess is that its a shorter term history (10 or 20 years?) dominated by the high P/E 1990s period, skewing it higher.


Earnings’ Stretch Run 
If Corporate Growth Slows,  Stocks Could Look Too Pricey
WSJ, January 16, 2007; Page C1   

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What's been said:

Discussions found on the web:
  1. Macro Man commented on Jan 16

    Since 1968, the trailing P/E of the S&P 500 has averaged 17.7, so 20 seems high but not ludicrously so. Funnily enough, the current trailing P/E is bang on the 39 year average, despite long term yields being at the low end of the historical range.

  2. Eclectic commented on Jan 16

    P/Es, Rabbits, and a dog named ‘Tass.’

    A very good rabbit dog will jump a rabbit often within minutes of being put into the woods. My uncle’s dog Tass was one of the best, and soon he’d be off, howling in the chase of a just-found rabbit.

    The rabbit is smart and knows he can not outrun the dog. At least he can’t outrun him long enough to take a rest, because the dog is relentless.

    Therefore, what the rabbit does, bred into it by countless years of instinct, is to double back and cross its scent trail. It’s the only hope of losing the dog, by having it diverted to chase the scent in the opposite direction long enough for the rabbit to rest and make a complete escape.

    What that means is that the rabbit will do something that an inexperienced hunter will never expect… the rabbit will suddenly, in the momentarily dead quiet of the woods, pop up right where he was jumped initially.

    The hunter will have no reason to believe this will happen because the dog’s howling will be echoing off distant trees as he pursues the somewhat confusing trail left by the doublecrossing rabbit.

    But, the rabbit will have no mistake about the dog’s position, and he’ll pop up quietly, twisting his radar ears, and he’ll know where the dog is as well as if the dog were carrying Onstar around his collar.

    Therefore, the experienced hunter knows in advance that he’s very likely to get the best shot just within a few paces of where the chase began, simply by quietly waiting and not being distracted by the howling or his desire to chase off after it, but to wait until the rabbit does what he’s always done before.

    The rabbit doesn’t have to explain itself, or justify why it’s popping up, when and where, it does. It only knows it’s a rabbit and that’s what rabbits do.

  3. Josh commented on Jan 16

    First Sheep, now rabbits. Eclectic’s posts are certainly interesting.

  4. Fred commented on Jan 16

    I had seen this Birinyi chart before. My question is, why did they only use that time period…one that was (generally) a VERY tough market. This data period also has the Fed hike anchor squarely on its back. This make the findings less relevent to me.

    BR: Its the past 4 years, and goes back to when the market bottomed in Q4 2002

  5. Mike M commented on Jan 16

    According the S&P website, the trailing 12 month PE is 18. Most of these analysts use forward, and oftentimes operating earnings. Baiscally, a guess of the future with all the bad stuff taken out. Stocks are expensive by every reasonable measure (trailing PEs, P/BV, P/Sales, P/Div). When earnings slip, stocks will appear outrageously expensive.

  6. Peter Pan commented on Jan 16

    I was under the impression that the long term mean for forward PE of the market is around 12. That’s substantially lower than the forward PE of 20 touted as average.

  7. albrt commented on Jan 16

    “Basically, a guess of the future with all the bad stuff taken out.”

    No kidding. I can’t believe anybody even keeps track of historical “forward PE.” The worse the guesses, the easier the future comparisons. That’s like a patent medicine guy advertising that every other seller of his medicine is in jail, so it won’t be available for long.

  8. angryinch commented on Jan 16

    2002-2006 was a “very tough period” for stocks? LOL.

    The SPX has closed green in 35 of 47 months since 3/03. Not to mention the last 8 in a row and 12 of the past 13.

    If that’s a difficult period, what would an easy period look like?

  9. Fred commented on Jan 16

    Yo angry…you conveniently left out the scariest market period we have seen since the ’87 crash..the duct tape bottom. Data mining is a joke.

    S&P 1/1/02 – 10/31/02 returned (33%). LOL

  10. KL commented on Jan 16

    Earning It
    (Posted by David Gaffen WSJ)

    Never mind everything that happened before this – the peak earnings season begins now, and a rash of preannouncements have put the blended growth rate estimate for this quarter at 9.1%, down from 9.7% last week, according to Thomson Financial.

    With 43 different S&P 500 components expected to chime in with their quarterly reports this week, investors will have a better idea of which way corporate profits are headed. It’s too early to draw conclusions, but of the 31 S&P names that have reported earnings, just 55% have beaten expectations, which is so far short of the 60% average, which dates back to 1994.

    This quarter is expected to be a bit different than previous ones, with financial and materials stocks leading the way, and energy stocks and utilities trailing. When compared with the midpoint of the fourth quarter, estimates for financial companies have increased, while those for energy and utilities have decreased. While the decline in the growth rate would seem to put the current streak of 13 double-digit quarters of earnings growth in jeopardy, Brian Rauscher, equity strategist at Brown Brothers Harriman, does not think this is an issue.

    “We do not believe the next couple of weeks will be vastly different than the historical norm. Two key takeaways from this perspective are: 1) we expect there will be several high profile negative preannouncements and that the headline consensus growth expectation should fall to around 8-9%,” he writes, adding that “when all the reports for the S&P 500 are finally tallied, it is our opinion that the index will have surpassed the double-digit hurdle for an unprecedented 14th consecutive quarter.”

    For the entire Dow Jones universe, financials led the way in the third quarter, with 62% year-over-year growth.

  11. Macro Man commented on Jan 16

    Mike M

    Stocks are NOT “expensive by any reasonable measure.” The trailing earnings yield of the S&P 500 is 5.55%, which is higher than the yield on any Treasury security or 3 month LIBOR over the last twelve months. Over the last fifty years, the earnings yield on the S&P 500 has tyically been lower than the back end of the Treasury curve. The current trailing P/E is exactly the average since January 1968. Those measures are reasonable, in my view, and both suggest that US equities are at worst fairly valued, and more likely on the cheap side.

    As an aside, what is the “correct” price to book and price to sales for a company like Google, which has a P/B of 10 but is growing profits at 50% per year?

    Surely the most fundamental factor in determining the “correct” price of stocks is supply and demand. Demand growth is probably a function of US nominal GDP, give or take. As for supply? Well, US equities seem to be like land. They don’t make ’em any more, as net issuance has been negative for a number of years now.

  12. Mike M commented on Jan 16

    Macro Man,

    I’d much rather take 5% in high quality bonds than 5.5% in stocks, especially with profit margins at 50 year highs. Companies have lots of cash and are retiring shares, but to assume this as a permanent situation doesn’t make sense to me.

    We both have different opinions of value, which is OK.

  13. F commented on Jan 16

    “S&P 1/1/02 – 10/31/02 returned (33%). LOL”

    Which is why the chart starts 10/06/02.

  14. Norman commented on Jan 16

    Birinyi’s chart is interesting but from data point #9 on (about 1/2 of the time period they show) the two ‘seasons’ have equal performance.

  15. Lord commented on Jan 16

    A P/E of 15 is a 6.7% earnings yield, 20 a 5% earnings yield. Long term returns have been 6-7%. Stocks may be cheap compared to bonds, but bonds are expensive.

  16. Macro Man commented on Jan 16

    While I would certainly concur that government bonds are expensive, fighting against the wall of FX reserve manager liquidity has been a losing proposition. Given that there is so much global capital chasing returns, it is not immediately obvious to me why valuations in the 1960’s, for example, are particularly relevant today.

  17. MarkTX commented on Jan 16

    looks like earnings season was a big hit today…

    all stocks mentioned were up but MER

    AMR keeps making new highs without a PE

    2006 same as 2007?…

    The 3 things to know about the stock/bonds

    liquidity, liquidity, liquidity

    everything else is noise

  18. MarkTX commented on Jan 16


    WM was down almost 1%

  19. william commented on Jan 23

    This data seems to suggest that it is possible to time the market. Get out during earnings season and come back in otherwise for the other 8 months. Well, we all know that it is nearly impossible to time the market otherwise we’d all do it. The label data mining certainly does apply to this analysis.

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