Review
On March 6, 2017, we said the following:
“What stands out about the current move upward is the fact that the decline went into negative territory. While the decline wasn’t as low as we’d like, at or below the 1970 level, we have to accept that there are few times this indication went negative without a very strong recovery to the upside. For now, we’re hedging our commentary by watching for the 2013 level before going on to the 1964 peak. However, we suspect that the recovery in S&P earnings could test the 1976 peak.”
The chart below updates the Year-over-Year percentage change in the S&P 500 earnings.
At the time of the posting last year, the charting of the change was slightly above 0% and well below the 2013 level. We’ve highlighted in the red line the reported S&P earnings since 2016 to the most recent reporting. The orange horizontal line traces out the peak of 1964.
We’ll jump the gun on this matter and say that the 1964 target has been achieved. However, what comes to mind is the future. We’d opt for the 2004 level as the next upside target. The 2004 level would bode well for markets if it is accomplished.
Thinking Aloud
Year-over-year declines from a peak in positive territory to a trough into the negative isn’t a death knell for the markets. Instead, it appears that as the year-over-year change goes from the positive to negative, the market tends to slowly react. Therefore, we would like to see peak levels between the 1973 to 2004 level and then a decline thereafter to draw inferences on the negative implications.
We have totally thrown out the 2010 peak as a indication worth including in the prior assessment as it was merely a reaction to an extreme market situation that would be difficult to replicate. The 2010 rebound is on par with the 1988 peak which was simply an extreme response to the 1987 crash. These occurrence will happen again but require markets to “forget” the reasons why they happened in the first place. Our guess is that the next peak similar to 1988 and 2010 levels would be approximately in the year 2032 (a year that we have noted a possible secular market top on January 3, 2018).