During periods of market turmoil like the one we are experiencing, it's important to keep your eye on the ball and not to get overly distracted. If I had to just had to watch just one thing, it would be how forward 12-month EPS are evolving. That's because Ed Yardeni found that forward EPS is highly correlated with coincidental economic indicators. In that context, the current market weakness makes sense because what`s really bothering the market is a lack of growth. If the growth outlook were to improve, stock prices would stabilize and start rising again.
The chart below shows the latest update from John Butters of Factset. Consensus forward EPS still looks a bit wobbly, but its weakness is nothing like the 2008 bear market (annotations in red are mine).
Before you write me about how annual or quarterly EPS estimates are falling as a way of bolstering the bear case, this analysis from Ed Yardeni shows that EPS estimates for any single fiscal year tend to start high and decline over time. The way to normalize the falling estimate effect is to calculate a continuous forward 12-month EPS, which is far more stable.
If you don`t have access to a database with consensus EPS estimates to calculate an aggregate forward 12-month EPS, you can get it from Factset. Unfortunately, Factset only updates their estimates weekly on Fridays. If you are impatient, there are a number of ways of monitoring how growth expectations are changing in real-time.
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