from the May investment comments by Provident Investment Management
The market enters the first-quarter earnings season with modest expectations. Expectations are for Q1 earnings to decline just over 4% as we lap the benefit from tax reform and companies work to digest higher labor, transportation and raw materials costs. If expectations prove correct, this would be the first quarterly earnings decline since 2016.
Given full-year earnings are anticipated to grow in the mid single digits for 2019, of particular focus will be companies’ outlook for the remainder of the year. Sales for 2019 are expected to grow nearly 5%, which should help with increased costs.
We’ve seen pockets of frothiness in the market. The recent parade of IPOs — like the highly anticipated upcoming offering from Uber — aren’t necessarily indicative of cautious markets. Yet the forward P/E for the S&P 500 is currently below 17x. This is reasonable in a low interest rate environment, which helps boost the relative attractiveness of stocks.
If companies provide better-than-expected Q1 results coupled with an upbeat outlook for the remainder of the year, this could very well mean a continuation of the positive market trends we have seen so far this year.