Good Morning!


So here it is – even though Q4 earnings data seems like it just finished flowing in, we are staring into the teeth of the Q1 ’17 Earnings season starting this week.


We have repeatedly covered how one often sees a guiding down of numbers and then results are better than expected.  This is likely setting up as the case again.  Let’s take a look at the hard numbers according to Thomson Reuters I/B/E/S data by the numbers:


  • Forward 4-quarter estimate is now $135.14, with the quarterly roll (a record)
  • PE ratio: 17.4(x)
  • PEG ratio: 2.10(x)
  • S&P 500 earnings yield: 5.74% vs last week’s 5.54%
  • Year-over-year growth of the forward estimate: fell back to +8.3% with the quarterly bump vs the +8.96% (multi-year high) from two weeks ago.


Note the earnings yield for stocks – where the 10-year is back into the 2.3% zone.  Quite a risk premium and still showing signs of significant fear related to stocks.


Financials will kick the parade this week.  Airlines are later in the week and play a critical role in the Transport Index.  Note the semiconductor group has been a real leader – but also note summer is a time of “digestion” often in the sector.  So, don’t be surprised to see a pause after big runs – even with out-sized earnings reports.


The Larger Picture Elements at Hand?


Thomson Reuters is looking for 10% S&P 500 earnings growth for Q1 ’17.  Factset on the other hand, using slightly different variations, is looking for 8% growth.  Now, the historical pattern for S&P 500 earnings, were one to crunch all the numbers, is that “actual” reported earnings tend to exceed “estimated, expected” S&P 500 earnings growth by about 4%.


As such, with Thomson expecting a 10% S&P 500 earnings growth at the start of the quarter, the historical pattern would suggest “actual” growth would come in between 13% and 14%.  Likewise, the Factset projection of 8% estimated S&P 500 earnings growth for Q1 would hint at something closer to 11% or 12%.


If one puts this all together for a blended average, the Thomson and Factset’s “expected” Q1 earnings growth would be about 9%  as of this weekend.  Adding on the assumption that we see the 3%-5% “surprise” upside seen every quarter, then once all the dust settles, we could see growth between 12% and 14%.


Sounds solid – and it is – especially in light of the sentiment data noted again below for you.  Just recall that the comp’s are pretty easy given the ugliness of Q1 ’16 which heralded in the current lows of the crude oil and (most of the) commodity price cycle.


Speaking of Sentiment


In case you missed it late week – note the fall into the 20’s for the percentage of AAII respondents who are bullish.


In light of the notes above and the 10-year falling back toward pre-election lows in the 2.3% range, one can easily see that fear remains quite stationary in the minds of many.

The charts above are separated by an interesting note I have pasted in for you.  The middle item is surely supported by the two charts.  I have added a giant red arrow to each chart – helping you see just how rare these reading are – and how it relates to where we were in March of 2009.  The red line on each of the sentiment charts is the S&P 500.


Note that the blue line makes up over 400 weekly readings since the 2009 lows.  Well over 95% of those readings are above where we ended last week – while markets chop around a few percent below all time highs.


Incredibly positive given the contrary nature of sentiment.


The sentiment readings today speak volumes about how much is being misunderstood as it relates to the opportunities ahead.  The crowd continues to show you their feelings by how they treat their money.  Money continues to flood into bonds – at even the slightest hint of a pause in stocks.


A Shout Out to GDP


How many times have we heard that our GDP stinks, moves too slow, it not accomplishing anything, etc., etc., etc.?


I saw this chart and thought you might find it interesting.  In all the hype – it is easy to overlook that there is only one pause in actual annual GDP output/growth over the last 50-odd years.


Yes, in the 2008-2009 event period.


I have highlight that period for you in the second chart with the red dot.  The more important item is the green dot in the close-up second chart.  It shows that the worst thing we can recall of the last 50 years, took just one year for the economy to get back to record high GDP output!


Seen from afar in the first chart – does this really look like something too many should still be afraid of?

Back in the 20’s again for bulls – almost 40% for bears!!!!


It is good news that nearly 3 in 4 are afraid of the market again.  If lucky, earnings season chop could provide for an even lower reading.


Sounds nutty – but hold your nose and pray for a correction.


Be aware there will be much chatter in the media about the ongoing Trump troubles, the sell in May process and the summer haze here before you know it.


Be prepared and use it to your advantage.


There is a glaring misunderstanding of just how positive the events are currently unfolding under the surface.


As always, anything with a long-term positive slant demands patience, discipline and the ability to stay on your path while others will fret over every headline.


And by the way – just a hunch – but if we can’t see a correction over the next few months with all this noise, terrible Trump ratings and reel-to-reel media head-fakes, take heed – this market is far stronger than many recognize.


Think demographics – not economics.


Until we see you again, may your journey be grand and your legacy significant.