When investing in the equity market there are two factors that go into deciding what assets to buy: 1) what is the value of the asset today; and 2) how much will the earnings of the asset grow in the future. The first one is fairly easy to figure out.   The second is more difficult.   Many people are asking why the market is struggling. Much of the answer to that question is macro – China, Federal Reserve, Middle East uncertainty and the Ukraine to name a few. Although these are important factors in helping to explain why the market is struggling, they are only meaningful if they impact the future earnings of the companies you are investing in. The real reason, in our opinion, for the difficult market is that company earnings are declining as have expectations for 4^th quarter earnings.

The first chart below shows how estimates for 4^th quarter earnings have dropped from a positive growth rate of over 4% in July to a negative number today. In the second chart, you can see that for three of the four quarters in 2015, earnings will or are expected to be negative for the S&P 500. That is why stocks are struggling. If companies do not grow earnings, they are not worth as much. We would surmise that the reason why larger companies have not fallen further in the US is that the estimates for earnings growth next year are extraordinarily high – see the second chart below. In a difficult business environment both here and abroad, one has to wonder if these estimates are too high. In our opinion, they are too high and we expect to see 2016 earnings estimates to be revised down in the months ahead.

What does this mean for portfolios?

Because we believe earnings estimates for US large companies are too high for this year and next, we expect US large companies to underperform other parts of the market. This is why THOR has the lowest exposure to US large companies in our firm’s history.   There are opportunities – emerging markets, energy, BDC’s – but investing a significant amount in US large companies is not a wise strategy at this time.