Stocks’ good performance has raised the question as to whether there needs to be a pause or a price adjustment. Two measures can help provide the answer.
With only Nike left, the other 29 DJIA stocks have all reported their quarterly earnings and, in most cases, their 2014 annual results. From that base of facts, combined with managements’ commentaries and outlooks, analysts have the information to improve their 2015 earnings estimates. This activity can be viewed in how the 2015 earnings estimates have changed.
Additionally, investors have taken in the same information and updated their thinking. Their overall reactions can be viewed by looking at stock performance.
Here, then, are the report cards. (The data are shown in a table at the article’s end.)
Year-to-date stock performance:
While the DJIA stocks’ median (mid-point) return this year is 2.8%, there has been a wide spread as shown in the following graph. Importantly, looking down the list, we can recall the news and discussions, particularly about the top and bottom performers. What’s important is that the performance reflects the news.
Relationship of earnings reports to stock performance
Overlaying how the 2015 earnings estimates have changed, it is clear there is only a loose correlation between the estimate adjustments and the stocks’ price changes. While it would comforting to see especially the strong price rises supported by estimate increases, there is more to valuation determination than the current earnings estimates. Take, for example, McDonalds. The news of management and strategy changes encouraged investors even though analysts have not put any positive effects into this year’s earnings.
The bottom line
The wide spread of performance among the 30 DJIA stocks shows selectivity is at work, not a simplistic bullishness to own stocks. Regarding the link between performance and 2015 earnings estimates, the correlation is loose. However, the qualitative tie between risers and positive developments and decliners and negative developments appears strong.
Therefore, the stock market looks to be functioning normally, with investors taking facts into account and not being carried away either positively or negatively.
The details
The table below shows the data for the DJIA stocks and how they have changed. Note the “high” and “low” notations for forward P/Es. There has been little movement in those rankings, except where forward earnings were dramatically reduced (e.g., Chevron, Exxon and Caterpillar). The relative steadiness of rankings is another sign of stock market normality.
