Market Update

Well, that was quick. After a panicky Q4 of last year, when S&P 500 almost entered a bear market, stocks raced back up this year, erasing all losses and touching new all-time highs. While no rational explanation can be given for such erratic moves, the most likely reason is changing earnings expectations. Six months ago, analysts were busy lowering estimates, and there was talk of so-called earnings recession, which is at least two quarters of declining year-over-year earnings. As of few weeks ago, Q1 earnings were expected to decline by more than 4%.

With about half of announcements in, that doesn’t look likely. 77% percent of companies that already reported exceeded expectations, and there is actually a chance that there will be a small gain once the earnings season is over. After a slow but likely positive Q2, earnings are expected to accelerate later this year and in 2020. No recession is in sight so far.

On the valuation basis, stocks are not cheap, but neither they are expensive. The forward PE ratio is at 16.8, only slightly higher than 5-year average of 16.4. Of course, no one knows where the markets go from here, and a correction is always possible.  But it is futile to worry about this. Instead, it is always advisable to tune out short term noise and macro headlines and instead concentrate on well managed businesses and their earnings. For example, so-called FAANG stocks reported quarterly results, and all of them exceeded expectations with an exception of Google which slightly missed on revenues.