It’s only been 10 days since I updated my Expectation Ratio, but as the bulk of the S&P 500 has started to report earnings, the trend is clear. The caution that the ER was predicting is clearly coming to fruition despite very healthy earnings overall. Remember, the ER is meant to be a forward looking indicator of what’s to come in terms of future expectations so the caution in corporate guidance is not unexpected given the sub 1.0 reading in the ER.
In a recent Yahoo Finance video Nick Raich of Key Private Bank discusses this reality. He notes that the current quarter is fairly good, but that the Q4 and 2012 estimates are being cut as earnings season go on. He calls this a concerning trend as it is consistent with a market where analysts remain overly optimistic about the earnings potential for US corporations. He notes that this makes the market potentially risky as any exogenous shock could potentially cause a drastic earnings decline that catches analysts and investors off guard.
Source: Yahoo Finance
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.