There’s a decent chance that market participants may turn to international markets and individuals plays over the coming year. After all, the S&P 500 is arguably priced for perfection.
I’m not fundamental analyst. I stick to the charts. So if I do talk fundamentals, I like to look at the easy stuff. But sometimes, the KISS rule (keep it simple, stupid) works when we want to look at the big picture. Here are some thoughts from my armchair surrounding US market valuations.
Earnings for the S&P 500 (SPX) are expected to end up at $171 (consensus) for the year. The current level on the SPX of 2950 or so brings us to 17 x earnings. This may or may not be considered rich. Whatever the case, I’m curious as to whether there is a ton of upside for the markets. This, considering that the long termed average for the SPX PE ratio has been less than 16. Sure, we may see higher than expected earnings growth coming into year-end. On the other hand, with an economic slowdown (recession) being possible, there may be a fundamental argument for a flat to declining earnings picture going forward. Assuming earnings come in at or below that $171 consensus number, it might be argued that the market has little or no upside.
The chart below, courtesy of multipl.com shows us that trailing earnings put the PE at a very high multiple to start with (almost 22). But we’re looking at forward earnings today. So we’ll consider that $171 consensus projection for our estimations.
Below the chart is the long termed mean/average PE ratio, which is about 16. If the market were to contract from 17 to 16 times, we’d be looking at the SPX in the 2700 range. If the year ends with an earnings number below $171 for the SPX, its your guess as to what type of move markets would see. If earnings come in below $171, we are either looking at an expanding multiple to maintain current pricing (which is unlikely to last) or a falling stock price to bring things back to the 16-17 PE average.
Keeping with our $171 estimation: At 17 times, we are looking at a flat market. At a contraction back to historic multiples of 16 times, we are looking at a 200 point decline for the SPX. All of this suggests that it doesn’t hurt to examine international alternatives to domestic investments. Long time reader “JP” sent me this link regarding the subject of fundamental valuations on the S&P after I had written this blog–so I’m adding it post-dated for those interested..
Below are a few charts that caught my eye.
Broad European markets
The IEV ETF is a benchmark indicator for the EU markets. Europe has already seen its share of pain. Brexit, the PHIGs bailouts, contraction in Germany (their strongest market component). These, amongst other factors have pushed the collive indices to underperform US markets.
However, we may be looking at a pre-2009 turnaround scenario for many of their major markets. Germany is likely to stimulate. Do you recall what stimulation did for our markets during our last recession? Brexit will also likely come to a head soon. Could there be value across the sea? The chart suggests the making of a Head & Shoulders formation. It needs to break the neckline before being considered legitimate. One worth watching…
Broad Emerging Markets
The emerging markets space has been consolidating for a year after a very bearish 2018. To me, this looks to be a giant triangle setup. A breakout would be bullish. A breakdown would not be so good. Worth watching to see what happens!
Note the nice H&S bottom before the 2017 bull rally for EEM. Clearly, breakouts are big for these markets.
Japan has been trading absolutely range bound for the better part of two years now. That range does provide opportunities. Buying near the bottom, selling near the top as illustrated on the chart below might be the prudent way to invest in Japan. However, a breakout, or breakdown, might provide a new set of opportunities (long or short) for traders. Again, this is one worth watching, but also potentially worth trading if it stays withing the current trading zone.
Another consolidating market. Watch for the breakout.