Corporate earnings have rebounded in recent quarters, growing 6.35% year-over-year in the S&P 500 after several years of decline. Analysts expect further modest earnings growth in 2017 and stronger double-digit growth beyond 2017, though estimates are often overly optimistic. While recent positive economic data and potential pro-business policies under Trump have boosted expectations, current stock valuations are very high by historical standards given the stage of the economic cycle in the absence of confirmed policy changes. Continued earnings growth and flexibility will be important for investors as policy developments unfold.

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.
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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.
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Source: Bloomberg

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.
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Source: Bloomberg

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).
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Ten Year Treasury Yield

5. Experience Insight Impact
“Trump Catalysts” for Earnings Growth
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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. 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.
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Ten Year Treasury Yield
Historical S&P 500 Valuation - Shiller CAPE Method
Source: http://www.multpl.com/shiller-pe/

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
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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.
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