This Graph Suggests US Stocks Are Ready To Rumble

This Graph Suggests US Stocks Are Ready To Rumble
Paul Allison, CFA

6 months ago2 mins

Well-practiced investors and pundits alike were expecting a rough period for US company profit, with some expecting it to slice in half like during the 2008 financial crisis. But now that the first-quarter numbers are firmed up, it looks like they were getting ahead of themselves: corporate America pulled off results that were far less severe than expected – and most importantly, the outlook for the future is looking healthier. Analysts now expect companies’ profit to be marginally higher this year than last, and forward-looking estimates are back on the up too.

Take a look at data analytics firm FactSet’s chart: it shows Wall Street analysts’ one-year forward earnings-per-share estimates for the S&P 500 (dark blue line) plotted against the price of the S&P 500 index (light blue line). Notice that after a period of falling estimates, the line is moving higher. That’s a big deal: it tends to pull stock prices higher. Remember, too, that firms and analysts tend to err on the side of caution with their expectations, so company profit could well shoot past those predictions. That would lead to even higher estimates – something known as the beat-and-raise earnings game, a favorite pastime for Wall Street forecasters.

If that beat-and-raise game gets into full swing, it bodes well for US stocks. And sure, there are plenty of risks in the market: a big one being that the S&P 500 has been driven by a small number of artificial-intelligence-linked superstars. But that AI theme will likely only grow broader and stronger. And given that US profit performance has been impressively resilient too, the S&P 500’s valuation – currently close to its five-year average of an 18.3 price-to-earnings (P/E) ratio – doesn’t look overly expensive. If you’re keen on the US, the Vanguard S&P 500 ETF (ticker: VOO, expense ratio: 0.03%) or the iShares Core S&P 500 UCITS ETF (ticker: CSPX, expense ratio: 0.07%) could be tidy places to start.



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