Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist October 24, 2014


Please read domestic and foreign disclosure/risk information beginning on page 5
Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.
2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.




Earnings to the Rescue
The Q3/14 earnings season is now in full gear with roughly 300 companies in
the S&P 500 Index (S&P 500) reporting earnings over the next two weeks. So
far, results have been solid, which we expect to continue over the reporting
season.
Of the 178 companies to report so far, 142 companies have reported earnings
above analysts estimates, resulting in a beat rate of 80%. This is well above
recent quarters and the long-term average of 62%.
S&P 500 Q3/14 earnings are forecasted to be US$29.03/share, which would
equate to growth of 6.4% Y/Y. We believe the final growth rate may actually
come in stronger, possibly in the 8-9% range, as weve witnessed a consistent
trend of upside earnings surprises over the last year.
More importantly, S&P 500 quarterly earnings are set to hit a new all-time
high. While the bears like to claim that the Feds quantitative easing (QE)
policies are the only thing supporting the equity markets, they must not be
looking at corporate earnings, which have been very strong and are hitting new
all-time highs.
We expect corporate earnings to remain healthy in the coming quarters, which
should be supportive to equities.





Equity Market YTD Returns (%)
Canadian Sector Curr. Wt Recommendation
Consumer Di screti onary 5.9 Market wei ght
Consumer Stapl es 3.1 Market wei ght
Energy 24.3 Overwei ght
Fi nanci al s 35.4 Overwei ght
Heal th Care 3.1 Underwei ght
Industri al s 8.7 Overwei ght
Informati on Technol ogy 1.9 Overwei ght
Materi al s 10.9 Market wei ght
Tel ecom 4.6 Underwei ght
Uti l i ti es 2.0 Underwei ght
Technical Considerations Level Reading
S&P/TSX Composi te 14,486.8
50-DMA 15,093.1 Downtrend
200-DMA 14,674.0 Downtrend
RSI (14-day) 45.0 Neutral
Source: Bl oomberg, Raymond James Ltd.
-2.1
-7.3
-0.1
-0.1
-4.1
5.5
-0.6
6.4
-13 -8 -3 3 8
MSCI EM
MSCI EAFE
MSCI Europe
MSCI World
Russell 2000
S&P 500
S&P/TSX Small Cap
S&P/TSX Comp
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
15,000
15,500
16,000
Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
S&P/TSX
50-DMA
200-DMA


Chart of the Week
Q3/14 Consensus Estimates Are Pointing to 6.4% Y/Y Growth For The S&P 500.
We Believe Earnings Could Come In Closer To 8-9% Y/Y.

Source: Bloomberg, Raymond James Ltd.
2.2%
5.2%
5.0%
5.4%
8.6%
9.2%
2.6%
9.2%
6.4%
11.7%
0%
2%
4%
6%
8%
10%
12%
14%
Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14F Q4/14F
S&P 500 EPS Growth Rate Y/Y

Weekly Trends October 24, 2014 | Page 2 of 4







Q3/14 Earnings Update
The Q3/14 earnings season is now in full gear with roughly 300 companies in the S&P
500 reporting earnings over the next two weeks. So far, results have been solid,
which we expect to continue over the reporting season. As weve conveyed in
reports over the last few months, corporate earnings are likely to take on a more
important role with valuations having expanded and the US Federal Reserve (Fed)
likely to end its asset purchases at month-end. We believe the equity markets are
slowly transitioning from one supported by the Feds QE policies to one based on
and driven by fundamentals. If, as we expect, corporate earnings continue to grow,
then this should be supportive to equities. Highlights of the US Q3/14 earnings
season include:
While only a third of the way through the season, results have been above
expectations. Of the 178 companies to report so far, 142 companies have
reported earnings above analysts estimates, resulting in a beat rate of
80%. This is well above recent quarters and the long-term average of 62%.
S&P 500 Q3/14 earnings are currently forecasted to be US$29.03/share,
which would equate to growth of 6.4% Y/Y. This follows the 9.2% growth
rate for Q2/14 and continues the trend of positive earnings growth since
the mid-2012 earnings slowdown. We believe the final growth rate may
actually come in stronger, possibly in the 8-9% range, as weve witnessed a
consistent trend of upside earnings surprises over the last year.
More importantly, S&P 500 quarterly earnings are set to hit a new all-time
high. While the bears like to claim that the Feds QE policies are the only
thing supporting the equity markets, they must not be looking at corporate
earnings, which have been very strong and are hitting new all-time highs.
From a sector perspective, nine of the 10 sectors are expected to post
positive earnings growth, with the materials and health care sectors posting
the highest growth rates.
Potential headwinds to earnings that we are monitoring include the impact
of a stronger US dollar and the deceleration of economic momentum in
Europe and Asia. These factors could weigh on the large US multinationals.
In sum, Q3/14 corporate earnings are on track to post a high-single digit growth rate,
which is supportive for equities and, in our opinion, not yet receiving the full
attention it deserves by the financial media.
Consensus is Pointing to 6.4% Y/Y Growth 80% of S&P 500 Companies Have Beaten Estimates

Source: Bloomberg, Raymond James Ltd.
2.2%
5.2%
5.0%
5.4%
8.6%
9.2%
2.6%
9.2%
6.4%
11.7%
0%
2%
4%
6%
8%
10%
12%
14%
Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14F Q4/14F
S&P 500 EPS Growth Rate Y/Y
70%
72%
71%
73% 73%
71%
74% 74% 74%
75%
80%
60%
65%
70%
75%
80%
Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14
S&P 500 EPS Beat Rate
Long-term Average = 62%
S&P 500 Earnings Are Projected
To Hit a New All-Time High in Q3/14
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14
S&P 500 Quarterly Earnings Per Share
Q3 $29.03

Weekly Trends October 24, 2014 | Page 3 of 4







Valuation Update
We also wanted to provide an update on where North American (NA) valuations
currently stand. Overall, we would characterize the NA markets as fairly valued, with
the S&P 500 and S&P/TSX Composite Index (S&P/TSX) trading in line with their long-
term averages.
One technical approach that we employ is Elliot Wave, which posits that markets
trade in repeatable patterns of five primary waves. Based on our Elliot Wave count,
we believe that wave three commenced on September 2011. From that low, the S&P
500 gained 78%, with its trailing P/E increasing from 11.9x to 17.5x today. That is a
sizable increase in the multiple, with some citing the current valuation as being
worrisome for the equity markets. While we agree that valuations have expanded
markedly, which is one factor in our call for more modest rates of return over the
next few years, we do not agree with the assertion that markets are steeply
overvalued and likely to peak soon. Consider this:
While valuations have increased they are now just slightly above their long-
term averages. For the S&P 500, the long-term average is 16.4x, with the
current multiple just 1 point above the average. For the S&P/TSX, it
currently trades 18.4x, which is just below its long-term average of 18.9x.
Given valuations are trading in-line with their long-term averages, we would
characterize the markets as fairly valued at present.
On forward earnings estimates, the S&P 500 and S&P/TSX trade at more
reasonable P/Es of 16.3x and 15.5x, respectively.
We believe stocks are attractively valued when compared to bonds.
Currently the earnings yield (inverse of the P/E) for the S&P 500 is 5.9%
versus the 10-year Treasury yield of 2.3%, resulting in a historically high
spread between the two.
Finally, we note that equity markets rarely peak at their average, often
overshooting to the upside. In fact, we have found that the S&P 500 has
historically peaked in the 19x to 21x range. We believe further upside in
equities will likely be driven by earnings growth, but we cannot rule out the
potential for further multiple expansion based on historical trends.
Valuations have increased with this strong bull-run. However, they are currently just
in line with their long-term averages and are below typical peak levels.
S&P 500 P/E Has Increased Markedly to 17.5x However, That is Just 1 Point Above the Long-term Avg

Source: Bloomberg, Raymond James Ltd.
11
12
13
14
15
16
17
18
19
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
S&P 500 Trailing P/E
0
5
10
15
20
25
30
35
'54 '59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09 '14
S&P 500 Trailing P/E
Long-term Average
= 16.4x
Market Peak S&P 500 P/E (LTM)
Date At Market Peak
12-Dec-61 22.4
9-Feb-66 18.0
29-Nov-68 18.0
11-Jan-73 19.5
28-Nov-80 9.1
25-Aug-87 22.5
17-Jul-98 27.3
24-Mar-00 30.6
12-Oct-07 17.5
Average 20.5
Avg Ex Mar 00 19.3
Median 19.5
Historically the S&P 500 Has Peaked
at an Average/Median of 20.5x/19.5x

Weekly Trends October 24, 2014 | Page 4 of 4







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