After reading and studying J.P.Morgan's Guide to the U.S. Markets for Q1 of 2019, I wanted to share some insights.
S&P 500 Index at inflection points
- 2018 was the 9th year of consecutive growth from 2009. Two previous economic cycles were growing for 3 and 5 years, respectively.
Valuation measures
- Forward P/E ratio is not exactly correlated with the price index. Current P/E of 14.4 returns to the levels of 2013, below 25-year average.
- There is very little relation between 1-year returns to forward P/E ratio. R2 only 10%.
- The situation starts getting interested when looking at the relationship between 5-year annualized returns and forward P/E ratio, with R2 of 44%. Interestingly the sweet spot of 10% annualized returns can be seen at ~15× P/E.
Sources of earnings per share growth
- 32% YoY EPS growth in Q3 2018 was very positive, and was driven by 20 percentage points by margin growth, by 10 p.p. by revenue growth and by 2 p.p. by share counts. Every year this distribution is very different.
- Out of the last five years, buybacks have achieved the greatest cummulative values in 2018.
- Dividends per share of S&P 500 seems stable at 8.2%.
All the charts in the Guide to U.S. Markets are very easy to read and understand.