Unexpectedly Intriguing!
14 May 2014

Approximately every three months, we take a snapshot of the expectations that investors have for the S&P 500's trailing year earnings per share. The chart below represents the Spring 2014 update for our series, showing what has changed for investors in the three months since February 2014:

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2015, 13 May 2014 Snapshot

We find that earnings for the S&P 500 in the first quarter of 2014 are falling significantly below what investors had expected in the middle of the first quarter, but curiously, they would seem to be in line with what investors had expected three months earlier, in November 2013.

So what got the hopes of investors up so much in mid-February 2014?

The answer might be a misplaced belief in economic momentum - investor expectations for earnings in 2014-Q1 were buoyed upward by companies reporting stronger than expected earnings for the fourth quarter of 2014, as indicated by contemporary reporting:

The major US indices registered their strongest week so far this year and injected investors with optimism. The combined effect of better-than-expected earnings reports and a growing confidence in the economy gave a boost to US indices. The S&P500 rose by 2.35% reaching 1,839, the Dow added 2.28% to its value to close at 16,150 points on Friday, while the technological Nasdaq100 increased by 2.86% to end the week at 3,663 points.

Curiously, investors didn't appear to believe that harsh winter weather would be a significant factor for the quarter:

The stock market started lower Friday following news that U.S. factory output fell sharply in January. Manufacturers made fewer cars and trucks, appliances, furniture and carpeting, as the recent cold spell ended five straight months of increased production.

The Federal Reserve said factory production plunged 0.8 percent in January, following gains of 0.3 percent in both December and November.

Investors are hopeful that much of the weakness seen in recent economic reports is due in large part to the unusually cold winter weather this year, said Kristina Hooper, US investment strategist at Allianz Global Investors.

"Investors are choosing to look at very mixed data through a positive lens," Hooper said.

In retrospect, investors were correct to discount the negative impact of harsh winter weather, but misread the signals that were being sent by U.S. automakers at the end of November 2013, long before the cold of winter had any impact, indicating that they had misjudged consumer demand going into the end of the year and would need to cut their production as the sales weren't there to support it. The same was true for homebuilders, where the new home sales that might drive purchases of appliances, furniture and carpeting also were decelerating long before Winter 2014 arrived.

In other words, the poor economic performance of 2014-Q1 had little, if anything, to do with unusually cold winter weather in much of the U.S., which is the real reason why investors have had to deflate their expectations for that quarter's earnings.

And as you can also see in the chart above, they've deflated their future earnings expectations all the way through the end of 2015.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Last Updated 8 May 2014. Accessed 13 May 2014.

Labels: , ,

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Stock Charts and News

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.