The markets are almost as quiet as the Big Ben (which is now under restoration for the next 4 years). Even with a couple of blips in the equity rally earlier this month and increasing tensions surrounding North Korea impacting every major economy the Vix has still remained below 16 for over 10 months now (after spiking briefly during Trump’s election news). The 1 or 2 day sell offs in equities did not (yet) materialise into anything more, and it seems that there’s very little out there that is able to move markets in a significant way. Of course we all know that this is too good to be or remain true. But one thing we’ve noticed is that this dampened volatility is also increasingly present on upside surprises.
Although the summer is typically a quiet time for financial markets there have continued to be earnings reports, with around 90% of US public companies reporting on their previous fiscal quarter in the last 6 weeks. Supposedly the good news is that, on the whole, reported revenue and earnings figures overwhelmingly surpassed forecasts and expectations. FactSet estimate that almost three quarters of S&P 500 companies beat Wall Street average EPS forecasts, which isn’t actually that exceptional. Moreover almost 70% of revenue results were above forecasts, which is quite unusual as historically this tends to be more evenly balanced. That’s the good side of the earnings news.
The negative side of this news was the market reaction to these consensus beating results. By our counting, around 250 companies (that’s around 75% of those that have thus far released a positive earnings surprise) saw their market value decline on the news. This pessimism is unusual and last occurred in the second quarter of 2011. Of course the S and P 500 has rallied over 80% since then so by itself it’s certainly not a sure sign that a bull run in equities is about to fade. But it does bode one to question: how the market will react when reported sales and earning fall short of forecasts in future earnings seasons.
Following the second quarter of 2011 the average PE ratio on the S and P 500 did actually fall from ~15.5 to as low as 12.6; only after this did it storm to the ~22 level earlier this year. Of course this ratio cannot keep rising forever but it did reach as high as 30 during the tech bubble of 1999. More recently in the past 6 months it has ebbed lower to just below 21 and could continue this trend downwards if like recent weeks earnings keep rising but prices remain fairly steady: which wouldn’t be such a bad thing for the global economy. Of course the PE ratio could retrace lower for another obvious reason, back towards the average historical ranges, and until such occurs we continue to see better value and risk adjusted returns in selective high grade credits from net foreign creditor nations.