The stock market is a forward looking mechanism. That means that the current market price is always looking forward several months and basically predicting how the economy will be.
There are many economic reports that are released on a regular basis that market participants follow very closely. The No. 1 drive of stock market performance is corporate earnings.
Earnings reports are released on a quarterly basis and can have a big impact on stock prices. One of the mostly widely used tools that stock analysts use is known as the PE or price to earnings ratio.
The PE ratio is simply the price of the stock divided by the companies’ earnings per share. The PE ratio can also be calculated for the market as a whole.
For the S&P 500, that is done by getting the PE for all 500 stocks that make up the index. Currently, the PE ratio of the market is about 17.60, which means that is takes $17.60 to buy $1.00 of earnings. Historically, this is not a very high level.
Earnings season traditionally kicks off with a report from Alcoa on July 8. Even though Alcoa is considered to start the earnings season, by the time Alcoa reports, several other S&P 500 companies will have already reported.
Currently, the bar is set pretty low for earnings; many companies have made earnings pre-announcements, and the pre-announcements have been mostly negative with a ratio of about 6.5-to-1. The overall forecast is for earnings growth of about 3 percent and that number has come down from 7 percent on April 1 of this year.
The sectors with the strongest earnings growth are projected to be financial stocks and the homebuilders. Financials are projected to show a 16 percent increase and the homebuilders are forecast to be up by 12 percent.
Sectors that are forecast to decline include information technology and mining. The price of gold has declined by more than 30 percent since it hit its all time high in August 2012.
Silver and copper are also down. The drop in commodity prices will have an impact on the earnings of the miners, who are projected to drop by 4 percent.
Tech stock earnings are projected to slow by 5 percent, as sales of personal computers are way down, and Apple, which accounts for 15 percent of the sector, hasn’t announced any new products lately.
Kenneth Roberts is a Truckee based Registered Investment Advisor. Information on his money management service can be found at his blog at www.sellacalloption.com or by calling 775-657-8065. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.