On Valuation

Sam Ro over at "Business Insider" does an excellent job summarizing the belief among many that we are about to see a trough in corporate earnings growth this quarter.  One of the main reasons that stocks have struggled this year with almost no appreciation up to this point has to do with the decline in corporate earnings.  In general stock prices advance and PE multiples expand when earnings are growing and the opposite occurs when these are contracting.  In a year like this when there's been a lot of uncertainty over earnings you get indecision, something investors hate.   This rolling over of earnings has been attributed mostly to the earnings collapse in energy names and commodities companies as the prices of their underlying products have plunged this year, the decline in exports related to a stronger dollar and to slowing sales growth in places like China and other emerging markets.   

Many think this could be on the verge of reversing.  China and other parts of the emerging markets world could start to grow again in 2016, there is a belief among some analysts that the worst of the commodities and oil cycle may be behind us now and there is also an argument that a stronger dollar could be a tailwind for corporate profits next year.  I'm not so sure I agree about the effects of a stronger dollar on earnings but let's just assume for a moment that part is also correct.  

The thing not often mentioned in this overall flattening of profits is that earnings growth in sectors like, technology and health care have been pretty healthy, so the thinking goes that if some of these other sectors at least stabilize then we may see stronger earnings in 2016.  I'm in that camp unless energy prices experience another leg down.  If that's the case then consensus estimates for the S&P 500 at around $124 per share may be too low.  That could burn off some of the higher PE valuations we've been seeing in the market this year and at a minimum could possibly put a floor under stock prices going into 2016.

Like I said, I'm in the camp that earnings will be better in 2016 but only time will tell.

Link:  Sam Ro, Business Insider.com:  "Here's the Inflection Everyone in the Stock Market is Praying For."

*Long ETFs related to the S&P 500, China, emerging markets in client accounts.  Clients and personal may also have exposure to oil or energy related names, commodities and or any of the other sectors mentioned above.  Please note these positions vary depending on individual client investment mandates and can change at any time.