Read The Label

Read the label.  Stocks resumed their upward charge yesterday as investors cheered the upcoming Phase One Trade Deal signing. The US removed China’s currency manipulator label as a concession and the bulls seized the opportunity.




A Dollar earned.  Let’s talk earnings, shall we?  This morning, JP Morgan Chase will officially cut the ribbon to Q4 earnings season and it should be an interesting one based on what we know today.  First and foremost, much of what traders focus on in earnings season has to do with misses of beating analyst expectations for earnings. Analysts base much of their forecasts on information they receive from companies in the form of guidance, in which management gives their input on future (as in the next 6 – 12 months) prospects.  So analysts come up with revenue and earnings expectations and on the day of announcements beats are cheered and misses are jeered. Well, not always, but you get the general idea.  Once we actually get the earnings we can derive earnings per share, or EPS.  If we divide a company’s stock price by its EPS we get the highly followed P/E, or price to earnings ratio.  This simply tells us how much investors pay for each dollar of earnings.  A high multiple means that investors are paying a lot for earnings and therefore have great expectations for future prospects, and vice versa.  The P/E is best used to compare a stock to its peers or its sector or industry group allowing investors to see if a stock may be expensive or a bargain.  Of course, it is not that simple but that basic analysis is the starting point for many professional investors.  Now that we are on the topic, what can we expect in the weeks ahead as we get that fresh bit of data from companies?  The consensus analyst forecast for aggregate S&P500 Q4 EPS is for a -1.9% decline from a year earlier, making it the worst year since 2015, in which the index fell -0.73% for the year.  The decline would mark the 4th consecutive quarterly decline and is a far cry from the 2018 post-tax-plan gains of +23%.  What does that mean for the markets?  If we use those expectations we can come up with what we call Forward P/E, which is simply the same as the normal P/E I mentioned above but using expected earnings instead of actual.  Using that we see Forward S&P500 P/E at around 19 times earnings, compared to the 10-year average of 15 times earnings.  That means that investors are paying more for earnings than they did in the past 10 years on average.  What it really means is that investors are very bullish on stocks… or that stock prices are outpacing earnings.  The last time stocks were at these multiples was in 2018 just before they sold off.  In the days ahead, investors will be paying close attention to forward guidance.  For good reason.




Stocks climbed yesterday as investors were bullish on trade with China.  Chinese Vice Premier Liu He will travel to the US and is expected to sign the Phase One trade deal as early as tomorrow. The Treasury Department removed China from a list of currency manipulators as a good will gesture and the bulls were energized.  The S&P500 climbed by +0.70%, the Dow Jones Industrial Average advanced by +0.29%, the Russell 2000 traded up by +0.72%, and the NASDAQ Composite Index jumped by +1.04%.  Bonds slipped and 10-year treasury yields climbed by +3 basis points to 1.84%.




– The Consumer Price Index Excluding Food & Energy is expected to show that prices increased  by +2.3% year over year, same as last month.

– New York Fed President John Williams and Kansas City Fed President Esther George will speak today.

– This morning JP Morgan Chase and Delta Airlines both beat expectations.  We will also hear from Citigroup and Wells Fargo before the opening bell.


daily chartbook 2020-01-14


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