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Perspectives from Above the Noise -- Week of March 20th, 2017

| March 20, 2017
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All three major domestic averages finished the week with fractional gains, returning to a seven week upward trend with just one interruption during the week ending March 10th. Last week’s gain was due, in most part, to Wall Street’s embrace of the Federal Reserve’s widely telegraphed ¼-point rate hike on Wednesday, their third rate increase in 15 months. Fed policymakers voted 9-to-1 to raise its target range for the federal funds rate to 0.75%-1.00% and held its outlook steady, with two more increases targeted for this year and thereafter tighten gradually until they reach 3%. Rate-sensitive sectors gained the most, including Real Estate, while the smaller cap focused Russell 2000 Index advanced nearly 2%, its biggest weekly gain since December.

For the week, the S&P 500 rose +0.28%, the Dow Industrials edged +0.06% higher, and the MSCI EAFE (developed international) advanced +2.70%.

What We’re Reading

A Dissenting Fed Rate Hike View -- Market Watch

Oil Weakens on Rising US Production -- Reuters

G-20 Meeting Takeaways -- Bloomberg

Chart of the Week: S&P 500 Trades at Premium Above Average Since 2000

The S&P 500 continues to trade at elevated valuation levels, even as the benefits from an anticipated cut in corporate taxes, the reduction of the penalty for foreign tax repatriation or increased infrastructure spending are not yet finding their way into analysts’ 2017 or 2018 earnings-per-share (EPS) growth estimates. The full-year 2017 growth estimate for S&P 500 companies is now pegged at 10.5% versus an initial estimate for 11.2% growth. This erosion in full-year estimates is not uncommon, however. According to CRFA (S&P) Research, the actual full-year S&P 500 operating EPS growth rate since 2000 has averaged 5.8% below the beginning-of-year estimate. In addition, consensus Wall Street analyst estimates have overestimated year-ahead results in nearly two out of every three years.

The initial 2017 S&P 500 EPS estimate pointed to $130.90 per share versus today’s $129.87 estimate. Should 2017’s results mirror the prior-year average erosion, EPS will come in below $124 for only a near-5% year-on-year increase. Earnings growth for 2018 currently stands at $146.25, slightly below the estimate at the start of this year. As a result, and as Chart 1 shows above, the S&P 500’s Price-to-Earnings (P/E) ratio on the next 12-month (NTM) hovers near 18.3X, the highest multiple of this bull market. Moreover, CFRA (S&P) Research calculates that the P/E on NTM EPS is currently trading at a 13% premium to its 16.3X average since 2000 and more than a 16% premium to its median valuation of 15.7X. In other words, since prices lead fundamentals, analysts and investors alike remain hopeful that company fundamentals can pick up the pace in order to justify extended valuations.

Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.

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