Earnings season is upon us once again, and the US markets have reacted favorably so far. The broader US indexes were up for the week as of Thursday’s market close; led by the NASDAQ Composite with a return of 2.59%, followed by the S&P 500 and the Dow Jones Industrial Average at 2.07% and 1.92% respectively.
The major theme has been how companies are reacting to the trade talks with China. As of last week, 19 companies in the S&P 500 have reported earnings and of those companies, six have expressed a negative impact on their earnings that relates to China.[i]
What should we expect from Q4 earnings? A good way to gauge how earnings could turn out is to look at earnings guidance. Of all the companies in the S&P 500, 106 have issued earning guidance. What we have seen so far is that the overall tone is not positive. Breaking things down by sector, the Information Technology sector has the most companies that have issued negative guidance, followed by the Consumer Discretionary sector.[ii]
In terms of valuations, the S&P 500 has a forward price-earnings ratio of 15.56 times 2019 fiscal year earnings, which is still below its 5-year average. Since the intraday low on December 26th, the index is up a little more than 12%. That is more than a 50% recovery from the peak to bottom in 2018, in which we saw a 20% decline using intraday prices.
What does this all mean? For one, the recent rebound goes to show how difficult it is to time the market. For investors that may have gotten out of the market in December, they did not only lock in losses, but missed out on the upside we are seeing now.
That is why we emphasize the importance of having a sound financial plan, along with an investment management strategy that is aligned to your long-term goals. In the short run, markets are unpredictable; therefore, it is important to focus on the cash flows that are needed from the portfolio. If you are not taking distributions from your portfolio, and your financial plan has not materially changed, staying focused on the long run makes sense. However, if you are taking distributions, or will be in the next couple of years, the focus should be on meeting those cash flow needs, not on market volatility.
[i] Source: FactSet
[ii] Source: FactSet