weekly market commentary 4/15/2013

7/28/2019 Weekly Market Commentary 4/15/2013

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Jeffrey Kleintop, CFAChief Market Strategist

LPL Financial

LPL F INANCIAL RESEARCH

Weekly Market CommentaryApril 15, 2013

First Quarter Earnings Insights

Highlights

The dollar amount o rst quarter 2013

earnings per share or the S&P 500

companies is expected to be lower than in

each o the past three quarters and only 1%

higher than a year ago.

With the price-to-earnings ratio rising above its

long-term average, investors are getting more

condent about uture earnings growth.

Four times a year, investors ocus on the most undamental driver o

investment perormance: earnings. Unortunately, like the economy,

earnings growth remains sluggish. The rst quarter o 2013 is likely to

mark the ourth quarter in a row o low to mid-single-digit earnings per

share growth. The dollar amount o earnings per share or the S&P 500

companies is expected to be lower than in each o the past three quartersand only 1% higher than a year ago, according to the Wall Street analysts

consensus complied by Thomson/Reuters.

The sluggish growth rate or S&P 500 company earnings refects not

only slower growth among individual companies sales with revenues also

expected to be up only 1% rom a year ago, but also refects the shrinking

number o companies expected to post any growth in earnings at all, with

our o the 10 sectors expected to reveal declines.

1 Wall Street Expects a Big Rebound in Proft Growth

Source: LPL Financial. Bloomberg data 04/15/13

The S&P 500 is an unmanaged index, which cannot be invested into directly. Past perormance is no guarantee

o uture results.

Earnings per share (EPS) is the portion o a companys proft allocated to each outstanding share o common

stock. EPS ser ves as an indicator o a companys proftability. Earnings per share is generally considered to

be the single most important variable in determining a shares price. It is also a major component used tocalculate the price-to-earnings valuation ratio.

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Wall Street Analysts Consensus Forecast

S&P 500 EPS, Year-Over-Year % Change (Left Scale)

ISM Purchasing Managers Index (Right Scale)


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WEEKLY MARKET COMMENTARY

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Manuacturing Profts

The Institute or Supply Management (ISM) is one o the best leading

indicators or the economy and markets. The ISM is a group that represents

purchasing managers at U.S. corporations. The ISM surveys these

purchasing managers each month and publishes the results in the orm o

an index. Although manuacturing businesses make up only about 40% o

S&P 500 company earnings, demand or manuactured goods has been a

timely barometer o business activity o all types.

Currently at about 51, the ISM suggests a sluggish environment or prot

growth [Figure 1]. The level o the ISM index indicates that earnings

growth may be slightly positive this quarter, but unless it picks up

meaningully which seems unlikely given a sot U.S. consumer and the

broadening recession in Europe among other challenges prot growth is

likely to be only hal as strong as the consensus expects in coming quarters.

Looking Ahead

So ar, 29 companies o the S&P 500 have reported earnings. This week, 74

companies are scheduled to report, with about hal o the 500 companies due

to report by the end o April. While investors are very ocused on what the

prots were or the past quarter, it is what they may turn out to be over the

next several quarters that will likely have the most impact on the markets.

Much like last year at this time, estimates or earnings growth in the

third and ourth quarter are in the double-digits. In contrast to those loty

expectations, last year earnings growth in the second hal ended up

averaging just 3%. Again this year, the estimates or the coming quarters

are likely to come down as earnings remain bound by the sluggish economic

growth driving revenues. Analysts 10% third quarter 2013 and 13% ourthquarter 2013 year-over-year earnings growth expectations are out o sync

with their much lower 3% revenue growth orecast or the second hal.

Given weak productivity growth and already wide prot margins, it is

unlikely companies can produce double-digit earnings growth on low single-

digit revenue growth later this year.

However, we may not see major downward revisions to earnings estimates

in the coming weeks as rst quarter reports come in. Despite being way

too high last year, earnings growth expectations only came down about

1 percentage point during the rst quarter earnings reporting season o

last year. The likelihood o more gradual downward revisions to growth

expectations is one o the reasons why we still believe another sharp

1020% decline in the market similar to those seen in the spring o eacho the past three years is unlikely. See our March 25 Weekly Market

Commentary: 10 Indicators of a Spring Slide in the Stock Market or more

insights on our view o the conditions needed or a major market decline.

What We Are Watching

Earnings may come in better or worse than expected or the quarter,

depending primarily on actors that are hard to predict.


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U.S. consumers have benetted rom a return to all-time highs in the stock

market and the return to a strong housing market these actors combined

to result in strong consumer spending growth in the mid-2000s. On the

other hand, the combined drags o higher taxes, high gasoline prices,

sluggish job and income growth, and the overhang o more scal cli battlesto come may have weighed on spending. We will be watching to see how

these drivers may have oset each other in the rst quarter, especially

relative to the high expectations or the consumer discretionary sector.

About 40% o S&P 500 corporate prots are derived rom global sources.

Asian economies experienced improving growth in the rst quarter o 2013,

while Europes recession lingered. The extent to which these actors oset

each other across dierent sectors will be worth noting since the trend may

continue or much o this year.

Valuing Earnings

Investors are displaying the greatest condence in continued earnings growththey have had in the past ew years. This can be seen in the stock market rally

liting the price-to-earnings ratio, or what investors are willing to pay today per

dollar o earnings over the past our quarters, to 15.3. This is now just above

the long-term (since 1927) average o 15.1. The higher the price-to-earnings

ratio, the brighter the implied outlook or uture earnings growth.

While the rise in the price-to-earnings ratio to the long-term average

suggests stocks can no longer be considered cheap, they are not expensive

Since WWII, every bull market has peaked with a price-to-earnings ratio

o 1718, with the exception o the late 1990s/early 2000 bull market that

peaked at a much higher 28 [Figure 2]. From a valuation perspective, this

2 Bull Market Unlikely To Be Over Yet at Price-to-Earnings Ratio o 15

Source: LPL Financial, S&P 500 04/15/13

The S&P 500 is an unmanaged index, which cannot be invested into directly. Past perormance is no guarantee

o uture results.

The P/E ratio (price-to-earnings ratio) is a measure o the price paid or a share relative to the annual net income o

proft earned by the frm per share. It is a fnancial ratio used or valuation: a higher P/E ratio means that investorsare paying more or each unit o net income, so the stock is more expensive compared to one with lower P/E ratio.

08 129284 96 0488 006460565248 7668 8072

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Trailing Four Quarter Price-to-Earnings Ratio (Left Scale)

S&P 500 (Right Scale)

Log

Scale

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1949196 5 Bull Market Peak: 17.8

19701972 Mid-Cycle Market Peak: 18.0

19821987 Bull Market Peak: 17.6

1990 2000 Bull Market Peak: 28.2

2003 2007 Mid-Cycle Bull Market Peak: 16.8

Current: 14.5


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Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

This research material has been prepared by LPL F inancial.

To the extent you are receiving investment advice rom a separately registered independent investment advisor, please note that LPL Financial is not

an afliate o and makes no representation with respect to such entity.

IMPORTANT DISCLOSURES

The opinions voiced in this material are or general inormation only and are not intended to p rovide specifcadvice or recommendations or any individual. To determine which investment( s) may be appropriate or you

consult your fnancial advisor prior to investing. All perormance re erence is historical and is no guarantee

o uture results. All indices are unmanaged and cannot b e invested into directly.

The economic orecasts set orth in the present ation may not develop as predicted and there can be no

guarantee that strategies promoted will be successul.Stock and mutual und investing involves risk, including the risk o loss.

Because o their narrow ocus, sector investing will be subject to greater volatility than investing more broadly

across many sectors and companies.

The Consumer Discretionary Sector: Companies that tend to be the most sensitive to economic cycles. Itsmanuacturing segment includes automotive, household durable goods, textiles and apparel, and leisure

equipment. The service segmen t includes hotels, restaurants and other leisure acilities, media production

and services, consumer retailing and services, and education ser vices.

The P/E ratio (price -to-earnings ratio) is a measure o the price paid or a share relative to t he annual net

income or proft earned b y the frm per share. It is a fnancial ratio used or valuation: a higher P/E ratio

means that investors are pay ing more or each unit o net income, so the sto ck is more expensive compared

to one with lower P/E rat io.

Earnings per share (EPS) is the portion o a companys proft allocated to each outstanding share o common

stock. EPS ser ves as an indicator o a companys proftability. Earnings per share is generally considered tobe the single most important variable in determining a shares price. It is also a major component used tocalculate the price-to-earnings valuation ratio.

INDEX DESCRIPTIONS

The Standard & Poors 500 Index is a capitalization-weighted index o 500 stocks designed to measure

perormance o the broad domestic economy through changes in the aggregate market value o 500 stocks

representing all major industries.

Purchasing Managers Index (PMI) is an indicator o the economic health o the manuacturing sector. The PMIindex is based on fve major indicators: new orders, inventory levels, production, supplier deliveries and the

employment environment.

suggests the S&P 500 could rise another 13% to 1800 without the benet

o any earnings growth beore the stock market could be considered

expensive and at signicant risk o a bear market.

All that said, we would not be surprised at a modest stock market pullback

o 5 10% as the earnings season oers us a reminder that although a scal

crisis in the United States and Europe may have been averted in the rst

quarter, it did come with a cost in the orm o growth. n

weekly market commentary 4/15/2013

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