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Features
Weekly Market Strategy
Economic Outlook
Download the full Weekly Market Strategy (pdf)July 15, 2008
S&P 500 profits are threatening to post their second consecutive year of declines in 2008, which would be the first since '90-'91. S&P 500 12-month trailing EPS were down 5.9% to US$82.54 in 2007. They are expected to reach US$74.39 (-18.7% YOY) in Q2/08. Earnings pain has remained concentrated in housing and credit related sectors so far. Financials are bearing the brunt with earnings collapsing 87% over the last 12 months. Discretionary earnings are off 24% YOY. Weakness could spread to "Main Street" and affectother sectors in 2H/08 as European growth falters and U.S. consumers potentially retrench. Our 2008 S&P 500 earnings forecast currently stands at US$82, which translates in a modest 0.7% decline over 2007. Consensus is looking for a 6.4% increase in S&P 500 EPS to US$87.83 which appears overly optimistic. Consensus may still have to come down further. For the TSX index, the earnings picture is quite different. TSX earnings growth hit 7% in 2007 to $802. 12-month trailing earnings are currently up 8.8% YOY to
$851. Broader Canadian profits are up marginally YOY (+1.9%), however, highlighting a harsher reality outside commodity-land. Consensus is looking for a 15% increase in '08 TSX to $922, in line with our top-down EPS forecast of $925 for 2008. MSCI World trailing earnings are up 8.7% YOY. Surging energy/food prices and slowing global growth point to moderation in global earnings growth in 2H/08.
The S&P 500 officially entered bear market territory last week. The U.S. benchmark closed at 1,239 on July 11, 21% below its October 9, 2007 closing level of 1,565. We emphasize the word "officially" as it has been rather obvious that we have been in a bear market for almost ten months. Another key benchmark, the MSCI World index, has also corrected more than 20% from its previous peak. Regardless of who is hitting the official 20% correction mark, most indices have been displaying all the bear trend characteristics since the fall of 2007. Moving averages are declining and we are hitting lower highs and lower lows. The Dow Jones Industrial Average had hit bear market status in June and most European and Asian indices already qualified last spring. In terms of length, the average S&P 500 bear market lasts 16 months with the
average correction hitting 30%. Furthermore, on average 60% of the total correction occurs in the second half of the bear market. Twelve months after the bear is over, the S&P 500 jumps 34% on
average. This bear market is ten months old and the S&P 500 decline stands just shy of 21%. Getting an average 30% correction would imply a 1,110 level on the S&P500, i.e., another 10%-12% drop. We have argued recently that the S&P500 had moved to a lower trading range (1,200-1,350). If 1,200 does not hold, 1,100 should be the next floor.
- Vincent Delisle, CFA, Portfolio Strategist – Scotia Capital
continued... Download the full Weekly Market Strategy (pdf)