We have now completed three-quarters of 2017, and, as the year flies by at a lightning pace, the equity market continues to grind higher.
Very little has slowed the markets in 2017, even in the face of ongoing domestic political tensions, the threat of nuclear war with North Korea and the interruptions of devastating weather events.
Despite the occasional noise and distractions, the US and global economic pictures continue to improve, nurturing earnings growth and driving equity markets higher.
Starting in late 2014 earnings began trending lower, and the US economy slowed as well.
The earnings decline, coupled with the uncertainty surrounding the Fed’s interest rate policy, led to a massive amount of volatility in the equity markets.
However, since the second half of 2016, organic and sustainable earnings growth has re-emerged and that sign of economic health has up until now been the central impetus leading markets higher.
If current proposals for changing the tax code and cutting corporate tax rates can be enacted, they could act as a catalyst that can help fuel equities even higher.
Earnings began turning higher following the second quarter of 2016, at which time the earnings on the S&P 500 over the trailing-twelve-months stood at $86.92.
According to S&P Dow Jones Indices, since bottoming in mid-2016, the S&P 500 earnings are expected to surge by 51 percent, reaching $131.23 for the full year 2018.
In my opinion, the projected growth in S&P earnings suggests that the S&P 500 could increase another 30 percentage points by the end of the calendar year 2018.
As long as an increase in the S&P 500 does not outpace earnings growth, any appreciation in the stock market can occur without meaningful multiple expansion from its current level around 23 times 2017 earnings.
I don’t have a crystal ball to be sure. However, in my view, should the projected earnings growth take place, the S&P 500 could rise to a valuation of around 3,100.
It sounds optimistic for sure, but if earnings continue to grow and trend higher, while the economy continues to stay on target, it seems quite achievable.
- Mott Capital Management uses a long-term thematic growth approach to investing in equities. We search for investments that both reflect and help to shape generational and demographic shifts. Mott uses a philosophy of buying these companies for a 3- to 5-year time horizon, with the belief that a long-term holding period gives themes and our chosen companies a chance to fully develop. In our view, the long time horizon also serves to mitigate the risk associated with the short-term impact of market volatility.