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Roman Chuyan
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Roman Chuyan, President Model Capital Management LLC is a tactical investment manager. As opposed to buy-and-hold strategies that follow the market's ups and downs, tactical management adjusts the asset mix in order to reduce the market downside, but to participate in the upside. Model Capital... More
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Model Capital Management LLC
  • Does Earnings Slowdown (2.1% In Q2) And Elevated Valuation Mean Lower Equity Prices? 0 comments
    Aug 29, 2013 4:02 PM

    The Q2 earnings growth rate is a disappointing 2.1%. Analysts' consensus a month ago was 0.6%, and one would expect a 4% bump on top of that because reported earnings typically exceed estimates by an average of 4%. However, as the earnings season progressed, companies beat expectations by a lower-than-average amount.

    Looking at sector performance, Financials continued their strong lead in earnings growth this quarter (28% YoY growth). Materials (-9.5%) and Energy (-9.2%) were the worst-performing sectors. The IT sector (-8.0%) was the third lowest earnings growth sector.

    Expectation for Q3 is starting to look bleak. In this reporting season, with 80% of companies having issued negative guidance for Q3, analysts reduced their Q3 growth expectations to 4.3%, and that of Q4 to 10.8%.

    In their earnings calls, companies continued to be concerned about FX rates and soft export markets. The negative effect of higher payroll taxes in the U.S. was previously expected to wear off in 2H-2013 but this never materialized. The new concern this quarter is that higher interest rates will suppress earnings of the Financial sector.

    The P/E Ratio is one of Valuation factors (out of the total 22 factors) in our quantitative forecasting model (the PAR Model™), which our tactical strategies are based on. Though we use the actual trailing 12-month earnings in the model (to eliminate forecasting noise), we also track earnings growth dynamics in order to help our clients, and us, understand important trends in earnings and valuation. Valuation ratios (P/E and Price-to-Book) have been elevated for some time as a result of the strong rally in U.S. equities in 2012-2013. In February 2013, the Valuation group of factors turned negative in our model, which contributed to the overall return forecasts for the S&P 500 turning negative in July - very important for tactical/TAA strategies.

    If tactical management is part of your strategy, you may be interested in adding our systematic, model-based approach to your set of tools - sign up for a free trial of our U.S. Tactical Strategies research service for investment managers.

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