Courtesy of Doug Short.
Note from dshort: My friend Ed Easterling, whose Crestmont Research P/E valuation is a regular feature on this website, has published some new periodic updates to his ongoing analysis. The commentary below is reprinted from his latest distribution email to subscribers. To become a subscriber, simply add your email address in the upper right corner of Ed’s website.
The July 7th update to the Crestmont Research website is now available at www.CrestmontResearch.com. The updates are listed below in this newsletter. Your comments and suggestions are welcomed (Info@CrestmontResearch.com) and often influence future updates and additions.
Today’s updates are listed below. The most significant points are:
- this update includes a new graph to monitor the current level of, and trend in, reported earnings per share (EPS). The divergence between reported and normalized EPS has created a substantial divergence in the related measures of the price-to-earnings ratio (P/E). A key question related to the stock market over the near- to intermediate-term: Have profit margins and EPS entered a new era at historically-elevated levels or are they set to revert by more than 40% compared to next year’s forecast? Stay tuned…,
- the stock market increased by almost 5% in the second quarter, well above the rate of normalized earnings growth. Normalized P/E became more “overvalued” at 26.5 (certainly above the typical range for low inflation environments),
- the update to the current secular bear chart (with its most recent 157% cyclical bull surge) reflects a strong market in the second quarter, increasing almost 5% and increasing over 20% on an annualized basis, and
- volatility declined almost 5% over the past quarter and remains more than 30% below its historical average. High or rising volatility often corresponds to declining markets; low or falling volatility is associated with good markets. The current period of low volatility is a reflection of a good market, not a predictor of good markets in the future.
Earnings Trends: History & Future
NOTE: This is a new graph to monitor the current level of, and trend in, reported earnings per share. The divergence between reported and normalized EPS has created a substantial divergence in the related measures of P/E. Have profit margins and EPS entered a new era at historically-elevated levels or are they set to revert by more than 40% compared to next year’s forecast? Stay tuned…
This graph presents both (1) the historical trend for actual reported earnings per share (EPS), including a forecast by Standard & Poors, and (2) an inset graph presenting the historical record for S&P’s forecast over the past five years. To put the historical trend and future forecast into perspective, the graph includes Crestmont’s assessment of the long-term baseline trend for EPS. Crestmont’s baseline also puts into perspective whether current and forecast EPS are above or below the long-term trend for EPS. Note: red dots are included with numbers that reflect the month number (e.g., 2=Feb.); this provides a view of the history of recent EPS forecasts. Also, the inset graph reflects S&P’s EPS forecasts for recent years; forecasts begin about two years in advance and proceed until the year is finalized.
The P/E Report
There are numerous versions of the price/earnings ratio (“P/E”), yet there are very few of them that can be appropriately compared to the recognized long-term average of 15. The objectives of this report are to detail the current level of the P/E ratio, to answer frequent questions about it, and to address the status of the current stock market cycle.
This Secular Bear…So Far
This secular bear began in 2000 and has lasted well more than a decade. The surges and falls are relatively consistent in both magnitude and duration to past secular bear market cycles. With valuation levels still relatively high, as measured by normalized P/E, this secular bear has quite a way to go.
Stock Market Volatility: An Erratic Cycle
This graph reflects a measure of stock market volatility–the statistical standard deviation of monthly changes for the S&P 500 Index. The line on the graph reflects volatility for each trailing twelve-month period starting in January 1951 and continuing with each month to present. There are several insights from the graph. First, volatility is volatile; it cycles erratically over time. Second, periods of extremely high or low volatility often follow the other. Third, volatility tends to spend most of its time around the average (i.e., within 25% above or below the average).
| Please note that Crestmont Research maintains the same URL (i.e., the Internet address link) for subsequent updates. The benefit is that you can link to Crestmont’s website and always have the latest update. The drawback is that a few computers may be slow to recognize that the file has changed. In those few cases, the computer will reload the last downloaded file from its cache (internal storage). If you don’t see the updated version of a chart or article, please try clearing your cache or forcing a reload of the webpage or file. You are receiving this email from subscribing at the Crestmont Research website. If you want to be removed from future notifications, please send an email with the word “remove” in the subject to remove@CrestmontResearch.com (if you don’t mind, please include a short note in the body of the message letting us know why you are unsubscribing). |
Ed Easterling is the author of Probable Outcomes: Secular Stock Market Insights and award-winning Unexpected Returns: Understanding Secular Stock Market Cycles. He is President of an investment management and research firm, and a Senior Fellow with the Alternative Investment Center at SMU’s Cox School of Business, where he previously served on the adjunct faculty and taught the course on alternative investments and hedge funds for MBA students. Mr. Easterling publishes provocative research and graphical analyses on the financial markets at www.CrestmontResearch.com.
