The PULSE Monitor, a Citi Research study, finds that US Equity markets are comfortably positioned in ‘Positive’ territory on the crucial aspects of Price and Earnings.
PULSE is Citi’s acronym for the five market conditions of Price, Unanticipated, Liquidity, Sentiment and Earnings.
US equities and price
According to Citi analysts Tobias Levkovich, Lorraine Schmitt and Christina Wood, “the market still appears undervalued based on a normalized yield gap analysis and other metrics.” A mid-2014 S&P 500 (INDEXSP:.INX) target of 1,825 is possible given that market outcome statistics are still hovering below long-term averages.
However, an analysis of earnings yield gap with reference to Baa yields instead of 10y Treasury shows that the market may be fairly valued as of now.
On a Price to Earnings basis, the S&P 500 (INDEXSP:.INX) is positioned at 16.25X on a trailing Q4 EPS basis. This PE multiple falls within the range of 16X-18X, which has generally given a return of 5.4% (average) and 9.1% (median) over the subsequent 12 months. See Citi’s Bulls Eye below:
On a Price to Sales basis, the S&P 500 is at 1.57X while the long-term average (since 1985) is 1.29X.
On a Price to EBITDA basis the S&P 500 is at 8.43X compared to the long-term average (since 1985) of 7.41X.
On a Price to Book basis the S&P 500 (INDEXSP:.INX) is at 2.53X compared to the long-term average of 2.80X.
On an overall basis the market qualifies as ‘Positive’ on the P (Price) front.
US equities and earnings surprises/revisions
Citi’s analysis of 444 S&P 500 (INDEXSP:.INX) companies that have declared Q3 earnings reveals that the ratio of positive to negative surprises is running at 3.42X (as at November 7) compared to 2.81X for 2Q13 and 2.57X for 3Q12.
Moreover, earnings revisions are also showing a rising trend. Sectors which are in the forefront on upward earnings revisions are Consumer Discretionary, Financials, Information Technology, and Materials.
Furthermore, sectoral analysis reveals that all ten sectors showed upward earnings revisions in November compared to October.
A ‘Positive’ status for the E (Earnings) front is therefore justified.