Date
21 September 2019
The prospect of US equities rising further hinges on whether economic growth and corporate earnings can pick up its expansion pace after US-China trade talks wrap up. Photo: Reuters
The prospect of US equities rising further hinges on whether economic growth and corporate earnings can pick up its expansion pace after US-China trade talks wrap up. Photo: Reuters

Does corporate earnings trend support continued US equity rally?

US equities have outperformed in this round of global stock market rally. Perhaps we should examine whether it is justified by the corporate earnings trend.

As of March 1, over 96 percent of S&P 500 constituents have released their fourth-quarter earnings. 69 percent of these companies reported positive surprises, according to Factset.

Earnings per share (EPS) expanded by 13.1 percent from the same period last year, extending the double-digit growth for the fifth straight quarter.

However, this was also the first time that EPS growth fell short of 20 percent in one year.

This means corporate earnings in the United States continue to expand but at a slower pace.

Meanwhile, analysts have trimmed EPS estimates for S&P 500 constituents by 6.5 percent in the first two months of this year. That’s the biggest cut since the first quarter of 2016.

Stock prices usually move in tandem with EPS changes.

That actual and projected EPS are beginning to show a moderating growth clip is at odds with the stock market rally.

The prospect of US equities rising further hinges on whether economic growth and corporate earnings can pick up its expansion pace after US-China trade talks wrap up.

In fact, the 12-month forward P/E of the US market now stands at 16.2. Investors could be a bit overly optimistic as numerous economic indicators released recently are weaker than expected.

This article appeared in the Hong Kong Economic Journal on March 7

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal chief economist and strategist