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Market Perspectives - March 2017


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Market Perspectives - March 2017

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Market Perspectives - March 2017

  1. 1. Market Perspective – March 2017 Experience Insight Impact Overview: With fourth quarter earnings season for 2016 largely complete, it appears the S&P 500’s earnings growth rebound continued, albeit at a more modest pace than originally expected. This month we revisit corporate earnings and peer into future expectations. Over time, earnings tend to drive market performance, particularly when viewed in the context of valuations. 1
  2. 2. Corporate Earnings Are Rebounding Experience Insight Impact • The S&P 500 earnings have rebounded, growing 6.35% year over year. • After a few years of decline, the third quarter of 2016 finally demonstrated a return to positive earnings growth. • Continuing to build on this growth trend with mid-single digit increases is a promising sign. 2 Source: Bloomberg
  3. 3. Expectations for Growth Experience Insight Impact • The recent reversal from prior trends in growth, coupled with more positive economic data has caused expectations for more lofty corporate earnings increases in 2017. • Beyond 2017, analysts predict double digit growth. • The analyst community has repeatedly been overly optimistic on projected growth and it will be worth monitoring progress throughout the year, particularly in light of major policy changes which may occur. 3 Source: Bloomberg
  4. 4. Experience Insight Impact Earnings Estimates Are Subject to Downward Revisions Earnings growth forecasts tend towards the optimistic side over time and initial annual estimates are often revised down (sometimes substantially). 4 Ten Year Treasury Yield
  5. 5. Experience Insight Impact “Trump Catalysts” for Earnings Growth 5 Yield Difference: U.S. 10 Year Note – 10 Year TIPS Source: BloombergThe Trump administration is promising corporate tax cuts, fiscal stimulus, and deregulation in multiple industries. Republican’s direct policy actions are boosting business sentiment and future earnings estimates. The equity market may be partially incorporating this into expectations.
  6. 6. Experience Insight Impact Valuations Are Elevated Current valuations are very elevated at this stage of the business cycle in the absence of policy support (which may very well develop). Using the Shiller CAPE method (a conservative approach championed by Warren Buffett), the ten year cyclically adjusted price-to-earnings ratio ,“CAPE”, is at one of the highest levels in history. The only two periods that exceeded current valuations were in 1929 and the tech bubble. 6 Ten Year Treasury Yield Historical S&P 500 Valuation - Shiller CAPE Method Source:
  7. 7. Conclusion: The current bull market was accompanied by several years of negative earnings growth which resulted in elevated valuations. More recently, earnings have rebounded and are expected to rise further in 2017, which could create more rational valuations should such growth materialize. We are actively monitoring policy related catalysts, which may be a source of potential growth. With earnings growth continuing as an important part of the investment process coupled with the recently witnessed trends, flexibility remains essential. Experience Insight Impact Market Perspective – March 2017 7
  8. 8. Experience Insight Impact Disclaimer Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. 8