Thursday, November 15, 2018

Chart of the Week: Sources of S&P 500 Total Return

Hilliard Lyons’ Investment Strategy & Research team is dedicated to supporting you and your Wealth Advisor. We provide investment guidance and help you separate meaningful news from idle noise via timely market commentary.

Sources of S&P 500 Total Return

Recent Multiple Decline at Odds with Earnings Forecasts

Broadly speaking, market return can be broken down into three major components: dividend, earnings growth, and change in price-to-earnings ratio (P/E). Dividends and earnings roughly approximate income generated by the underlying firms, while a change in P/E represents shifting market sentiment. It tracks the price move in relation to earnings; a contracting P/E indicates prices are dropping relative to earnings, and vice versa. From a valuation perspective, a lower P/E indicates a cheaper stock market.

In the chart above, we can see that the contraction of forward P/E in YTD 2018 is the largest since 2009. However, the 2009 contraction was roughly matched by the decline in forward earnings projections; that is, the price drop was substantiated by the notion of less future earnings. That isn’t the case today. Thanks in part to tax cuts and a strong economy, forward EPS projections have risen consistently throughout 2018.

In fact, with over 90% of the index reporting Q3 earnings, the S&P 500 is seeing sales growth of 8.32% and earnings growth of 26.77%, one of the best quarters since the 2008 crisis. That said, forward P/E has dropped from 18.3x at the start of 2018 to 16.2x currently, its lowest since 2015.* Should earnings expectations prove accurate, stocks are looking attractive vs. recent history.

*S&P 500 sales and earnings growth and forward P/E data per Bloomberg.


Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.

Past performance is not a guarantee of future results.

Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.

All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.