Weekly S&P 500 #ChartStorm - 19 Aug 2018

Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes and hammer them home with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context beyond the 140 characters of Twitter. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to.

So here's the another S&P 500 #ChartStorm write-up!

1. S&P500 Long Term Earnings Growth Estimates: First up is a look at a peculiar yet astonishing indicator, the Thomson Reuters IBES consensus estimate of long term earnings growth for the S&P500. The main point here is that it's at the highest level since the dot com boom. Back then it was euphoria about the new economy, now it's the tax cut extension from the previous reflation turnaround. I would say it shows a certain element of euphoria on the earnings outlook, and the question is how long this higher level of expected growth can hold up? (and how much higher can it get from here?).

Bottom line: Long term earnings growth estimates are at the highest point since the dot com bubble.

S&P500 long term earnings growth chart

2. S&P500 Operating Margins: On a similar line, the next chart by Charlie Bilello of Pension Partners shows S&P500 operating margins at a record high. This is a powerful chart. It's bullish for the obvious reasons (and bullish for capex growth - something I've talked about a lot). But again, there's the question - can it get much higher from here?

Bottom line: S&P500 operating margins are at a record high.

S&P500 operating margins chart

3. Most Favorable Profit Outlook: This chart, shared by Cam Hui of Humble Student, shows one of the really interesting trends observed in the latest BAML fund manager survey. It shows fund managers now overwhelmingly expect the best profit outlook in America. This says a lot about the capitulation we've seen on the relative value trade as investors give up on cheap valuations in emerging markets and buy expensive US stocks, opting for the "cleanest dirty shirt".

Bottom line: Global fund managers expect the best profit performance in America.

profit outlook US vs global

4. Forward Earnings - US vs Global: Another angle on the same issue, this chart from Ryan Detrick of LPL Research shows the progression of forward earnings for the USA vs the MSCI EAFE (Europe, Australasia, and Far East), and MSCI EM (emerging markets). Basically we're seeing divergence as US forward earnings estimates go from strength to strength whereas EM has been deteriorating and EAFE basically going sideways. Again it's this divergence in earnings prospects which is driving the relative value capitulation (more on that in the next chart), not to mention the stronger US dollar... it's all interconnected!

Bottom line: US forward earnings are improving vs lackluster growth in global ex-US.

earnings outlook for S&P500 vs EM and EAFE

5. Global Equity Valuations: As noted, and as I've previously talked about, global equity valuations show a picture of expensive stocks in America and cheap stocks basically everywhere else. Emerging markets are still on the bottom rung of the ladder, trading at a substantial discount to US and a material discount to DM ex-USA. If you could ride out the volatility the thing to do would be to buy the cheaper stuff as valuations tend to speak for themselves in the longer run. For now short term headwinds dominate, so who knows, maybe cheaper valuations are yet to come!

Bottom line: US equities still look relatively expensive compared to EM and DM ex-US.