Standard and Poor’s 500 Index (SPX)

Why do we start here?

Simple, almost all of the work is done for us and there is a whole industry of highly paid professionals who are constantly providing updates, comments and criticisms to help us monitor this important gauge of earnings potential in the market. And, although it is not often mentioned, nearly half and sometimes more than half of the earnings represented by the S&P 500 are earned outside the US. So, far from being a narrow measure of the US economy, this index is a decent starting point to develop a view on Global Economic Conditions. Thirty years ago that statement would have rung of an American centric view of the world. But globalization and the saturation of the US market means that non-US sales are critical growth drivers for “All American” companies like McDonalds and Coca-Cola.

What about other indices and indicators?

The proliferation of computers and high speed connections with the exchanges has resulted in an explosion of indices as well as the ETF revolution. And there is no reason why one could not decide to construct one’s own index. But remember, the point here is to take a measure of the market. And the ubiquity of the S&P 500 means that we can return to the index at any time in the future and have solid reference points to work with.

OK, so what are we looking for?

We are looking to see what’s in it for the shareholder (which may be us). If we buy a 10 year bond yielding 2.8% and we do not plan to sell it before maturity, we pretty much know what to expect. Most bonds pay out twice a year. For stocks, it is a little more tricky because of three reasons: the shareholder is entitled to but cannot necessarily spend the earnings, those earnings suffer from varying degrees of predictability and there are many legitimate ways to report the earnings. So, when trying to determine the direction of earnings, which will be one of the three determinants of the direction of the asset price, make sure you compare like with like.

Where do we stand in 2014?

So far, it looks like earnings will be mildly positive in the medium term. The Global Economy continues to shake off the effects and some of the “cures” of the Global Financial Crisis of 2008/9. However, this recovery has not progressed as quickly as previous recoveries. Employment and inflation remain below levels usually associated with the fourth or fifth year of a global recovery.

Year End Index EPS EPS Change Index at Year End Index Change P/E Ratio
2000 56.13 8.6% 1,320.28 -10.1% 23.5x
2001 38.85 -30.8% 1,148.08 -13.0% 29.6x
2002 46.04 18.5% 879.82 -23.4% 19.1x
2003 54.69 18.8% 1,111.92 26.4% 20.3x
2004 67.68 23.8% 1,211.92 9.0% 17.9x
2005 76.45 13.0% 1,248.29 3.0% 16.3x
2006 87.72 14.7% 1,418.30 13.6% 16.2x
2007 82.54 -5.9% 1,468.36 3.5% 17.8x
2008 49.51 -40.0% 903.25 -38.5% 18.2x
2009 56.86 14.8% 1,115.10 23.5% 19.6x
2010 83.77 47.3% 1,257.64 12.8% 15.0x
2011 96.44 15.1% 1,257.60 0.0% 13.0x
2012 96.82 0.4% 1,426.19 13.4% 14.7x
2013 107.38 10.9% 1,848.36 29.6% 17.2x
2014 119.85 11.6% 1,872.98 1.3% 15.6x
2015 137.28 14.5% 1,872.98 13.6x

Source: S&P Dow Jones Indices Webpage
Current Excel Spreadsheet

What are the risks?

On the upside, there is a small chance that growth could accelerate more quickly than currently envisioned. On a micro level, we could see some companies breaking out but overall, with Profits already at historic highs compared to GDP, it is hard to see corporate profits expand significantly across the board.

On the downside, earnings are likely to disappoint as analysts fine tune their numbers down throughout the year. However, this is a fairly common phenomenon and will probably be offset by strategists (who look at the markets from a top-down point of view) who will be compelled to raise their sector and overall earning forecasts.


Support from earnings growth but certainly not a driver of market performance this coming year. Earnings reports will be parsed more for what they say about the dispersion of expectations for earnings rather than the growth (positive or negative) itself.