Next week kicks off another earnings season’s Kabuki dance. CFOs will game analysts and investors with earnings projections designed to beat the street. Professional investors will have their own set of higher “whisper numbers” that could send individual stocks plummeting if not met.
Expectations for earnings season are high. This is in contrast to expectations regarding the economic outlook which again swooned on an uptick in unemployment. This again called into question the durability of the current economic recovery and whether we’ve successfully negotiated the soft patch.
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The most recent second quarter 2011 S&P bottom/up quarterly EPS estimates are expected to be up 5.5% from the previous quarter and up 14.1% from the previous year. This will be the peak quarter-over-quarter (QOQ) performance in 2011 but the year-over-year (YOY) quarterly performance will not peak until the fourth quarter at 19.8%.
Earnings estimates for 2011 are at $97.82 per share, up 16.8% YOY and up a further 14.2% YOY to $111.74 in 2012. Applying a historical average trailing 12 month P/E of 15 on 2012 estimates gets you get an S&P 500 valuation of 1676.10. That valuation will generate an appreciation in the index of 27% over the next 18 months.
For true believers, this is clearly a reason to get long and average down into equities. Stay with large cap dividend paying stocks such as the S&P 500 Dividend Aristocrats that can be purchased in the form of SDPR S&P Dividend ETF (SDY).
Disclosure: I am long SDY.
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