Little old but worth a look..Annualized Growth of S&P 500 Consensus Earnings Forecasts
<<I urged readers to buy last fall, just before the October bottom (see my column, here) and at last March's bottom. Those were outright panics, and stocks were just plain cheap. While it took nerves of steel to buy stocks then, in some sense it's harder now — because they just aren't so cheap. Yet as discussed in this column last week, while the value case for stocks is diminishing, the growth case is just beginning to really kick in.
The fact is that the economy is recovering, and the best proof of that is what's happening with corporate earnings. This is a little-known fact — I don't know why — but the reality is that S&P 500 earnings outside the technology sector are now at an all-time record high. That's right, the actual earnings booked over the last 12 months by the 422 nontech stocks in the S&P 500 are the highest in history. Who knew?
That's history. But now, forecasted earnings are accelerating. To see what I mean, take a close look at the chart below — it's complicated, but it's worth it. The pink line is the annualized rate of growth of consensus forecasted earnings for the S&P 500, on a rolling one-month basis. In other words, say forecasted earnings today are 1% greater than they were one month ago. That means earnings expectations are being revised up on a 12% annualized basis. The actual number right now is 22.5%! For reference, S&P 500 annual earnings growth over the last 50 years has been about 6%.
As you can see in the chart, the forecasted growth rate fell — and even went negative for a while — in the panicky weeks before the invasion of Iraq. When the war was resolved quickly, a burst of optimism moved the growth rate up to about the same high levels we have today. But now look at the blue line on the charts — long-term Treasury bond yields. When forecasted earnings-growth rates went above 20% in June, it was partly because interest rates (reflected here in bond yields) were so low. But as bond prices started to collapse and rates rose, panic started to set in again, and the forecasted earnings-growth rate plummeted.
That happened because so many investors have made the mistake of thinking that rising interest rates would stall the economic recovery. As I explained in last week's column, that's getting it exactly backward. It's the economic recovery that's moving rates higher — it's a good thing! As that more sensible view has begun to get some traction, forecasted earnings growth has started to soar again, even as rates have moved higher.
That tells me that the fundamentals are in place to support the next big move up in stocks. And the fact that stocks haven't already moved up in response to the accelerating growth rates tells me that market sentiment is in place, too. Investors may not be as terrified as they were in October and March — but they're still too worried to see the evidence of economic recovery when it's staring them right in the face.
The technicals are in place. The fundamentals are in place. Sentiment is in place. What about "great time to buy" don't you understand?
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