Three reminders about earnings

by: , Portfolio Strategist, New York Life Investment Management

The S&P 500 and Russell 2000 recorded new intraday highs on Tuesday, and U.S. equity markets claimed their spot for the longest-ever bull-market run in history. The question then becomes: where do we go from here? The answer may lie in earnings.

It’s a sweet deal

When you own a stock, you own a small piece of that company and, therefore, a portion of that company’s profits. As an investor, your bottom line is their bottom line. That is a pretty sweet deal these days, with profit and revenue growth soaring.

S&P 500 earnings growth

Source: Thomson Reuters DataStream, Institutional Brokers Estimate System I/B/E/S estimates of forward earnings on the S&P 500 index and represents growth for the next full fiscal year. Data as of 8/22/18. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Sustainability: Peak earnings growth vs. peak earnings

However, rapid earnings growth has led investors to question its sustainability. We think those concerns are misguided. The onetime effect of changes in tax rates will end this year (peak earnings growth), but the benefit of tax reform and of a growing economy doesn’t end there (peak earnings). Profit growth should continue alongside economic growth, further boosted by technological innovation and improving productivity. The expansion appears poised to extend into 2019 and beyond.

Earnings-per-share S&P 500

Source: Bloomberg, as of 8/22/18.

Earnings before interest and taxes (EBIT) growth

Source: Bloomberg, as of 8/22/18.

Small companies are outpacing larger companies

Smaller companies will continue to benefit disproportionately in this environment (tax reform, industry deregulation, trade tension) and thus will likely post better relative earnings growth for the next two years than large cap counterparts.

S&P 500 Index

Source: Thomson Reuters DataStream, Institutional Brokers Estimate System I/B/E/S estimates of forward earnings and revenue growth on the S&P 500 index and the Russell 2000 Index. They represent the growth for the next full fiscal year. Data as of 8/22/18. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Bottom line

We stay focused on the outlook for earnings. Throughout history, the market has faced its fair share of concerns, but in the long-term it surmounted those concerns as earnings grew.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Small and mid-cap stocks are often more volatile than large-cap stocks. Smaller companies generally face higher risks due to their limited product lines, markets and financial markets.

Earnings before interest and taxes (EBIT) is an indicator of a company’s profitability. One can calculate it as revenue minus expenses, excluding tax and interest.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.

Large cap (sometimes “big cap”) refers to a company with a market capitalization value of more than $5 billion. Large cap is a shortened version of the term “large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. The dollar amounts used for the classifications “large cap,” mid cap” or “small cap” are only approximations that change over time.

Russell 2000 Index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

Small cap is a term used to classify companies with a relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares.

S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, New York, New York 10010, provides investment advisory products and services. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Robert Serenbetz

Portfolio Strategist, New York Life Investment Management

Robert Serenbetz is the Portfolio Strategist with New York Life Investment Management’s Strategic Asset Allocation & Solutions (SAS) Group. He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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