All Eyes are on Q4 Earnings Season
We are three weeks into the new quarter and all eyes are on earnings season. Our start of the year target price for the S&P 500 was 3100 by year end, which is about 3.4% from today’s level. The S&P has tested our price target a couple of times and has been met by resistance (white line on the chart).
We believe in order to break through the resistance and move up to the 3100 level, one of two things must happen; either the U.S. and China must come to a trade agreement, or at least make good progress towards a trade resolution, or earnings season must demonstrate that companies are still resilient and producing better numbers than anticipated by investors and analysts.
According to FactSet at the beginning of the Q3, the average earnings per share would decline by 3.6% from a year earlier. The reason analysts were projecting a lower growth rate is because last year the growth rate in Q3 2018 was 25%, mostly driven by the tax cuts. In other words, when you have such a strong previous year, it is very hard to continue that growth. However, for the fiscal 2019 year, the S&P is expected to deliver single digit growth compared to fiscal 2018.
So far 66 companies have reported earnings, and of those companies, over 80% have reported better earnings per share and about 62% better than expected revenue growth. It is still early, but we think this earnings season, like Q1 & Q2, will not be as negative as analyst first projected. This will ease fear that things are slowing and will help push the S&P 500 to our year-end target of 3100.