Markets are continuing the sell off that began yesterday afternoon after the commentary from the Fed was perhaps a little more hawkish than investors were hoping for. The global narrative has become increasingly focused on slowing growth which continues to make investors nervous about the earnings picture for 2019, however the recent sell off below 2600 for the S&P 500 is providing some valuation support for the market.
For the past several weeks, the markets have been focused on trade, oil prices, and Fed policy. We would argue that the data on at least two, and potentially three, of these fronts has been positive. The US / China trade relationship has continued to thaw with commentary from both sides around continuing negotiations. While the Fed commentary from yesterday afternoon was perhaps a little less dovish than the market would like, it was certainly more accommodating than their previous statements. Oil is arguably a mild negative for the market as the price for WTI Crude has broken below $50, which is arguably pretty close to the breakeven production price for some fields within the United States. From a big picture perspective, lower oil prices are somewhat of a mixed bag for the United States. We are a net exporter of crude, but only by a small amount relative to our overall consumption, and the lower revenues we receive for production are offset by lower consumer energy costs. In any event, the lower oil prices are being spun by market bears as an indication that global demand growth is slowing.
Wall Street expectations for earnings for 2019 are currently around $178. With the S&P 500 trading around 2500, the market is trading at about 14x forward earnings, which is a low multiple relative to where the market has traded over the course of this cycle. There is some chatter in the market that earnings estimates may need to be lowered for 2019, but even if we assume that the 2019 earnings numbers comes in closer to $160, which is roughly flat to earnings in 2018, the market is still trading at about 15.6x, which is also pretty compelling relative to the valuations we’ve seen recently.
All of that said, market action may continue to be choppy through the new year as market volumes are typically light during the holidays. As we get into early January, we’ll start to have companies report fourth quarter earnings and issue guidance for 2019. Our sense is that these reports will help to solidify expectations for the earnings picture, which will help markets establish a better price foundation.
As always, please reach out to us with any comments or questions. We wish you all a very happy holidays!