Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.
The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.
Trade. The US and Canada came to a trade agreement just before midnight Sunday and it looks like the NAFTA problems are no more. The new agreement is the United States-Mexico-Canada Agreement (USMCA). The differences from NAFTA didn’t strike me as massive but there are some interesting ones. The major difference is that USMCA is renewable every 6 years and elapses after 16 years if not actively renewed or renegotiated.
If this is what we ended up with, the way we got here had a whole lotta drama and unnecessary frictions with our closest ally.
That said, the NAFTA headache is over and the markets were clearly relieved. US equities were up on the open and topped out at 2937 (up 23 points). That was another impressive victory for the bulls. The market faded over the rest of the session and tempered this morning’s enthusiasm. The China-US trade problems remain and who knows whether they get resolved as cleanly.
Looking ahead, the next earnings season has snuck up on us. PepsiCo announces tomorrow morning and JP Morgan unofficially kicks off the season on October 12. Earnings seasons have been wellsprings for the bulls this year and there are probably a lot of investors counting on history repeating itself.
Let’s see what the bottoms-up picture is at the moment.
Show me the money
S&P 500 bottoms-up estimates
- ’17 estimates are $130.42
- ’18 estimates are $161.33
- ’19 estimates are $178.07
- ’20 estimates are $196.03
with the S&P ~2,920:
- ’17 PE is 22.4
- ’18 PE is 18.1 and earnings growth is ~24% YoY
- ’19 PE is 16.4 and earnings growth is ~10% YoY
- ’20 PE is 14.9 and earnings growth is ~10% YoY
- ’17 rev estimates are $1,355
- ’18 rev estimates are $1,462… rev growth +7.9% YoY
- ’19 rev estimates are $1,543… rev growth +5.5% YoY
- ’20 rev estimates are $1,610… rev growth +4.3% YoY
Book value is $813
- ’17 PxBE is 16.2
- ’18 PxBE is 13.1
- ’19 PxBE is 11.8
- ’20 PxBE is 10.7
- ’17 profitability is 9.6%
- ’18 profitability is 11%
- ’19 profitability is 11.5%
- ’20 profitability is 12.2%
- ’17 ROB is 16%
- ’18 ROB is 19.8%
- ’19 ROB is 18.3%
- ’20 ROB is 17%
So huge growth in both earnings and revenue are in the books thanks to the tax cuts and the GDP acceleration of 2018. 10% earnings growth and ~5% revenue growth are the expectations for the next 2 years.
That’s a healthy expectation. Guidance for next year is going to be critical. The good/bad verdict for this earnings season will be decided there.
See you tomorrow,