crystal ball

Content provided by J.J. Schenkelberg, CFA, Senior Portfolio Manager

How to predict market returns. That is the magic formula that investors have been seeking since the beginning of investment time. While there are dozens of factors that could be used, the three predominant factors that are widely accepted throughout the investment world include:

1. Earnings Growth

2. Valuations

3. Investor Sentiment

Predicting future returns is as impossible as predicting the weather for the same time frame.  While there is no way to determine an exact return figure, one can get a general idea of what returns may look like in the future using these three factors.  Easy, right?  There’s only three major items. Actually, sometimes it is difficult to remember that all of those little data points we hear about in news headlines daily (unemployment rate, retail sales, housing, battles in Ukraine, etc.) help frame earnings, valuations, and investor sentiment. So, what does it look like now?

1. Earnings Growth – opportunities are modestly positive moving forward

  • 94% of U.S. companies have reported earnings for the first quarter. Earnings growth was 11% year over year for the group. Not bad.
  • Expectations for earnings growth continue to be reasonable, although slower, from companies. The two primary earnings inputs are profit margin and revenues. While opportunities for margin expansion are becoming slimmer, revenues continue to grow.

2. Valuations – prices appear fair to slightly over-valued.

3. Investor Sentiment – sentiment continues to improve and is currently at a relative high

  • Positive employment data and stabilizing economic data have improved investor sentiment.
  • On the flip side, this positive sentiment data can be a contra-indicator. The higher sentiment climbs the harder it can fall.

Overall, the three key indicators are pointing to modest gains over the near to intermediate term.