Fundamentals have been driving the stock market higher, not valuations: earnings during the past 1 year and 2 years have risen faster than the S&P index itself (meaning, valuations contracted). The strong growth in company profits is not due to a net share reduction (e.g., buybacks) either.
Looking ahead, expectations for 10% earnings growth in 2019 have already been revised down to 5%. This still looks too optimistic: if margins in 2019 remain at the same level as in 4Q18, then earnings growth will be 0%. Dollar appreciation and declining oil prices are additional headwinds that could cause earnings to fall this year.
Valuations are now back to their 25-year average. They are not cheap, but the excesses from early 2018 have been worked off: if investors once again become ebullient, there is room for valuations to expand. However, with earnings growth likely to negligible, the key for share price appreciation in 2019 is likely to hinge entirely on valuations expanding.
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85% of the companies in the S&P 500 have released their fourth quarter (4Q18) financial reports. The headline numbers were good, but not great. Here are the details:
Quarterly sales reached a new all-time high, growing 6% over the past year. On a trailing 12-month basis (TTM), sales are 9% higher yoy, among the best growth in 12 years (all financial data in this post is from S&P). Enlarge any image by clicking on it.