Blog - Stratos Private Wealth

Overdue Correction Finally Arrives

Written by Jeff Brown | February, 2018

Time to read: 4 minutes

This week, we drafted our latest report titled Irrational Exuberance, in which we reinforced our belief that equity markets were due for at least a 5% pullback.  Before the report was approved for release, that market correction was realized in short order.  See our recent commentary Record Streak Without Correction…Now What?  and our 2018 Market Outlook.  We argued that investors should expect increased volatility, take steps to manage behavioral risks, review concentrated stock positions, and make sure asset allocations were aligned with each client’s investment plan.

It was also our position that a 5-7% correction was overdue, but not necessarily a tradable event.  Instead, we choose to closely watch our short-term indicators before making portfolio shifts.  As of the time of this writing, our tactical rules continue to support the current asset allocation for each of our portfolio models.  This could change quickly, warranting a more defensive posture.  But that hasn’t happened yet.

We do think it’s worth highlighting one positive trend, however, which may help act as support for a euphoric market that’s beginning to blow off some steam.  The chart below shows analysts’ consensus projections for S&P 500 earnings per share for calendar years 2012 through 2018.  The average equity analyst tends to start each year with excessively rosy expectations for corporate earnings which are progressively tempered over time.  These downward revisions can clearly be seen in the chart.  Many investors may be surprised to learn that since 1984, analysts have started the year overestimating corporate earnings by 8%, on average.

The anomaly in the upper right corner of the chart is this year – 2018.   Over the course of January 2018, analysts have revised their projections up from $145.36 to $150.57.  These predictions are based in part on corporations’ reported earnings and the response to the recently passed Tax Cuts and Jobs Act of 2017.

As of this writing, the companies that make up the S&P 500 are only a few weeks into the first earnings season of 2018.  It appears that the market (or at least the average equity analyst) may have underestimated the benefits of the tax package on corporate earnings growth.  As equities correct after a period of excessive optimism, expectations for higher corporate profits should help…

 

Stratos Private Wealth is a division through which Stratos Wealth Partners, Ltd. markets wealth management services. Investment advisory services offered through Stratos Wealth Partners, Ltd., a registered investment adviser.  Stratos Wealth Partners and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only; and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.  Investing involves risk including possible loss of principal. Some of the information contained herein has been obtained from third party sources which are reasonably believed to be reliable, but we cannot guarantee its accuracy or completeness. The information should not be regarded as a complete analysis of the subjects discussed.