Sources: Rates Data —Bloomberg Markets as of 7/28/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 7/28/14
2nd Quarter Results show Earnings and Revenue Growth
Earnings season is about half way over as 228 of the S&P 500 companies have reported Quarter 2 results as of July 28. Since the economic recession occurred 6 years ago, companies have cut costs and gone a long way to become leaner, more efficient operators. This has resulted in profit margins that are high from a historical standpoint and have allowed companies to continue to grow their earnings despite having stable sales. This earnings growth has allowed companies to remain evenly valued from a historical standpoint as JP Morgan notes that Large Cap US Stocks are actually 3.4% cheaper than historical averages with a Current Price to Earnings ratio of 15.6 as of the end of the second quarter vs. the 20 year average of 16.2.
We are encouraged to see that this quarter, not only are earnings beating expectations but top line sales figures are also now starting to experience growth. As Market Watch reports, in addition to the 79% of companies that have reported earnings that beat expectations, 66% have also beaten revenue estimates. This should bode well for equity investors. To this end, Jerry Webman, Chief Economist of Oppenheimer Funds, reminds those worried about P/E ratios that they should, “Keep an eye not just on the numerator (price), but on the denominator, as well. P/E ratios don’t have to keep climbing for equity market gains to continue. As long as earnings grow, prices can rise even if valuations don’t. And so far, earnings appear to be doing just that.”
Important Information and Disclaimers
Past Performance is not a guide to future performance.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
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Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
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DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.