Analysts expecting middle of the road returns
We know that returns are a combo of multiple expansion and earnings growth. \(Returns \approx \%\Delta (P/E)+\%\Delta E\)
How do these two components typically move together to drive returns? Let’s look at a discretization of the joint density function.
Upper Right Corner: Boom. Earnings Growth and Margin Expansion.
Lower Left Corner: Bust. Earning Decline and Margin Contraction.
The density is relatively uniform, with a non negligible presence in the extreme joint quantiles.
Where are analysts expecting earnings and multiple to go? Let’s use the awesome work of Howard Silverblatt who tracks bottoms up estimates for the SP500.
Expectations are for central tendency on earnings and middle to low on PE expansion. The latter is no surprise given the extended valuations we see.
Notice the extreme right tail of OpEPS growth. That’s associated with the recovery during the Great Recession. Let’s remove that for a clearer picture.
Still the possibility of slight margin contraction and middling earnings growth. Decent historic chance of occurring.