Active week for earnings as 178 of S&P 500 companies are scheduled to report. As per FactSet, Q3 2016 blended year-over-year earnings are expected to decline 0.3%. The blended sales growth rate for Q3 2016 is 2.6%. The forward P/E multiple is now 16.5x, which is above the 10-year average of 14.3x. Friday’s advance release of Q3 2016 GDP should attract attention in addition to the five members of the Federal Reserve scheduled to speak today and Tuesday.


Equity investors should focus on earnings as the long-term driver for return. For calendar year 2016, analysts are projecting earnings growth of 0.1% and revenue growth of 2.2%. As of today, the consensus estimate for 2017 S&P 500 earnings is $132.30 (growth 12.4%) and the revenue growth estimate is 6.0%. This improvement in earnings and revenue coincides with the bounce in oil. According to FactSet, if the energy sector is excluded from Q3 results, the earnings growth rate for the S&P would improve to 3.3% from -0.3% (Chart 1 below).

Chart 1


Valuation should not be ignored. The forward S&P 500 P/E ratio is 16.5x, which sits above both the 10-year average of 14.3x and the 5-year average of 14.9x. Earnings before interest and tax (EBIT) margins will have to improve significantly in order to achieve the 2017 S&P 500 consensus earnings estimate of $132.30. We continue to recommend U.S. equities (long-term forecasted return approximately 6%). This week we have included additional valuation metrics for a broader perspective (Chart 2 below).

Chart 2

S&P 500  
2018 Expected 2017 Expected 2016 Expected 2015 2014 2013 2012 2011 2010 2009
EBIT Margin (%) 17.38 16.39 15.43 14.89 15.26 15.45 15.38 14.51 14.47 12.84
Return on Equity (ROE) (%) 16.26 16.17 15.28 16.01 16.11 15.74 15.90 15.79 14.57 11.90
Price/Earnings (x) 14.66 16.18 18.24 16.61 18.04 17.00 14.57 14.01 15.69 18.18
PEG Ratio (x) 1.37 1.51 1.70 1.64 1.67 1.44 1.36 1.24 1.50 1.77
Price/Sales (x) 1.67 1.75 1.85 1.70 1.80 1.63 1.36 1.26 1.39 1.27
Price/Free Cash Flow (x) 16.46 17.98 21.82 19.72 22.67 20.78 18.75 16.68 16.94 17.98
Price/Book Value (x) 2.38 2.62 2.79 2.66 2.91 2.67 2.31 2.21 2.28 2.16
Enterprise Value/EBIT (x) 12.38 13.63 15.48 15.02 14.27 12.95 11.25 10.43 11.26 12.28
Enterprise Value/Sales (x) 2.01 2.11 2.24 2.07 2.06 1.87 1.61 1.51 1.63 1.56
Payout Ratio (%) 34.90 35.59 38.33 37.18 33.32 32.07 29.45 26.96 26.78 36.56
Dividend Yield (%) 2.39 2.20 2.10 2.24 1.85 1.91 2.05 1.95 1.72 2.03
Source: FactSet  



Date Report Period Survey Prior
Monday, October 24: PMI Manufacturing Index Flash October 51.2 51.4
Tuesday, October 25: S&P Case-Shiller HPI 20 City SA M/M August 0.2% 0.0%
  S&P Case-Shiller HPI 20 City NSA M/M August 5.1% 0.6%
  S&P Case-Shiller HPI 20 City NSA Y/Y August 5.0%
  Consumer Confidence October 101.0 104.1
Wednesday, October 26: International Trade Balance September -$60.5 B -$58.4 B
  New Home Sales September 601 K 609 K
Thursday, October 27: Weekly Jobless Claims October 22 255 K 260 K
  Durable Goods New Orders M/M September 0.2% 0.0%
  Durable Goods New Orders Y/Y September -1.3%
  Durable Goods Ex Transportation M/M September 0.1% -0.4%
  Durable Goods Ex Transportation Y/Y September -1.1%
  Core Capital Goods M/M September 0.6%
  Core Capital Goods Y/Y September -3.1%
  Pending Home Sales September 1.0% -2.4%
Friday, October 28: Real GDP Q/Q Q3 2016 2.5% 1.4%
  Employment Cost Index Q/Q Q3 2016 0.6% 0.6%
  Employment Cost Index Y/Y Q3 2016 2.3%
  Consumer Sentiment October 88.5 87.9


LONG-RUN STRATEGIC POSTURE:  Our long-run forecasts lead us to be overweight in large cap domestic growth stocks, high-yield corporate bonds, and gold in the diversified “core” of portfolios. Underweight positions in “core” are long-term U.S. Treasuries, foreign developed equities, and REITs. The equity allocation in the short-term tactical “satellite” portion of portfolios currently stands at 60% equity / 40% fixed income.

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Kevin Caron, Portfolio Manager
Chad Morganlander, Portfolio Manager
Matthew Battipaglia, Analyst

Suzanne Ashley, Junior Analyst

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