US earnings growth is beginning to rise again. This explains why the US market is looking a little bit better than was expected as we head into 2020.
Estimates of market earnings are key inputs into our valuations of the US (S&P500 Index) and Australian stock markets (ASX200). Most of the stocks in US markets are not traded by individuals, they’re traded by machines. When machines look for a measure of earnings, they adopt the one that has the highest correlation to actual share prices. Even though the market talks about quarterly earnings (which are still important), what really determines the level that stocks vary is 12-month rolling earnings (per share).
The rate of growth in the 12-month rolling earnings in the S&P500 reached its peak in the third quarter of 2018, posting stunning growth of 27%. This was about a year after US corporate tax cuts were passed into law, which were the dominant driver.
Read more in Morgans monthly Investment Watch Update.
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