Please ensure Javascript is enabled for purposes of website accessibility

Next Week's Earnings: Handicapping the Bull

By Alex Dumortier, CFA - Apr 14, 2013 at 5:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Looking for clues in blue-chip company earnings.

The S&P 500 (^GSPC 1.36%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI 1.74%) just recorded their best weekly performances of the year. The S&P 500 is now up 11.4% on the year.

Not surprisingly, then, the VIX (^VIX -0.37%), Wall Street's fear gauge, plumbed its lowest level since March 15 on Friday, even dipping below 12 on an intraday basis. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

The earnings drum is beating
As I've argued several times in this column, the rally that began off last year's June low is being driven by valuation, rather than earnings, with the market willing to pay a higher multiple for a dollar of earnings, as investor risk aversion continues to dissipate. There are good reasons for this -- to a certain extent -- as fears of global macro dislocations have receded. However, I think it's worth sounding a few words of caution.

At a price-to-earnings ratio of 14.3, the S&P 500 may not look expensive on the basis of 2013 operating earnings per share; however, that figure masks the range of valuations across the different sectors. In a yield-starved environment, investors have been snapping up shares that pay rich dividends, and that enthusiasm is reflected in the P/E multiples of the consumer staples, telecoms, and utilities sectors, at 17.4, 19.7, and 16.4, respectively.

Furthermore, I continue to believe that the S&P 500's current forward multiple understates how expensive it really is. Consider that the 14.3 P/E assumes that operating earnings per share will rise nearly 15% year-on-year in 2013. That figure strains credulity; 2012 growth was 0.4%. On this point, first-quarter earnings will provide us with some clues either way, and we have a heavy week ahead of us in terms of earnings announcements, with nearly 15% of the companies in the S&P 500 reporting quarterly results, including more than a third of the Dow components -- 11, to be exact:

  • Tuesday: Coca-Cola, Johnson & Johnson, Intel
  • Wednesday: Bank of America, American Express
  • Thursday: IBM, Microsoft, UnitedHealth Group, Verizon
  • Friday: General Electric, McDonald's

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$31,807.24 (1.74%) $545.34
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$3,954.42 (1.36%) $53.06
CBOE S&P 500 Volatility Index Stock Quote
CBOE S&P 500 Volatility Index
$29.32 (-0.37%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.