Fundamentalis

5.11.13: SP 500 Earnings update: SP 500 Earnings Yield below 7%, First Time since December, 2007

Per Thomsonreuters, the forward 4-quarter estimate for the SP 500 slipped $0.27 this past week to $113.57, from last week’s $113.84.

With the SP 500 up  1.20% this past week, the p.e ratio rose to 14.4(x) those forward earnings.

The earnings yield on the SP 500 fell to 6.95% as of Friday, May 10th, the first time the ” SP 500 earnings yield” has fallen below 7% since December, 2007, according to our data.

Maybe that one metric more than others indicates the market has moved too far too quickly, but any attempt so far in 2013 to argue that the SP 500 is overbought, is simply met with more buying.

However the earnings yield was above 8% from January, 2008 forward, and that didn’t stop the SP 500 from falling over 30% that year.

The year-over-year growth of the forward estimate was 3.73% this past week, and seems to have stabilized the past three weeks.

With 451 of the 500 companies reporting earnings for Q1 ’13, year-over-year earnings growth is +5.3%, exactly where we thought it would be when the majority of the quarter was reported, while revenue growth is 0%.

We owe Bob Pisani an apology: last week Bob talked about “record earnings” for the SP 500 and in fact that is true since Bob is looking at the quarterly Q1 ’13 estimate for the SP 500 of $26.71 (according to ThomsonReuter’s table). Our analysis uses “forward 4-quarter” data, which is obviously different than the historical data from SP CapitalIQ being used by Bob. In a nutshell, we use forward estimates, while Bob is looking at trailing or reported historical data.

How does Q2 ’13 and full-year 2013 earnings growth look today ?

As you would expect earnings estimates for the SP 500 for Q2 ’13 are being revised lower, now at +3.4% versus the +6.1% on April 1, which is consistent with the pattern in evidence for the last year.

Three sectors, Financials, Telecom and Utilities have been the only sectors with their estimated earnings growth rates higher for q2 ’13, as of Friday, than as of April 1, 2013. Here is the data: (The first column is the estimated growth rate for Q2 ’13 as of Friday, May 10th, and the 2nd column is the estimated earnings growth rate for the sector as of April 1):

Consumer Discr: +8.3%, +10.1%

Consumer Staples:+4.3%, +6.5%

Energy: +2.0%, +4.6%

Financials: +18.3%, +17.6%

Health Care: -3.4%, -1.8%

Industrials: -2.2%, +2.0%

Materials: -0.6%, +10.9%

Technology: -3.4%, +2.5%

Telco: +19.4%, 13.4%

Utilities: -7.5%, -7.8% (the most oversold  sector of SP 500 currently)

SP 500: +3.4%, +6.1%

Commentary: for Q2 ’13, Financials estimates still bode well for the sector. Telecom and Utilities are just 3% of the SP 500 by market cap respectively, while Financials are 16% – 17%. Basic Materials, which is Freeport (FCX), Alcoa (AA), US Steel (X) DuPont (DD) and chemicals, is seeing ugly downward revisions. That group has given up 1,000 bp’s of expected earnings growth in 5 – 6 weeks. (Long AA, FCX)

2013 full-year estimates: here is the progression by sector for 2013 as of Friday, May 10th (first column), April 1 (second column) and Jan 1 (third column):

Consumer Discretionary: +11.5%, +11.7%, +13.8%

Consumer Staples: +7.7%, +8.3%, +9.5%

Energy: +5.1%, +4.5%, +4.0%

Financials: +17.9%, +15.4% +16.0%

Health Care: +0.3%, +0.4%, +5.4%

Industrials: +6.5%, +8.2%, +8.0%

Materials: +10.2%, +16.9%, +22.4%

Technology: +3.4%, +6.3%, +11.3%

Telecom: +22.5%, +21.8%, +21.5%

Utilities: -0.8%, -0.6%, +0.9%

SP 500: +7.7%, +8.2%, +10.3%

For 2013 as a whole, only 4 sectors are expected to have benchmark-beating growth: Consumer Discretionary, Financials , Materials, and Telecom, and the way Materials estimates are being revised lower, that sector’s earnings are likely to fall below the benchmark eventually.

Earnings commentary conclusion: the SP 500 earnings pattern is pretty clear: the last three months prior to the quarter, the y/y estimate gets revised closer to 0% – 1% growth, but actual SP 500 earnings growth (when companies report results) has been much stronger. For q4 ’12 and Q1 ’13, we entered each quarter looking for 0% earnings growth and have seen 6% and 5% respectively. Revenue growth is still punk and non-existent.

Something has to give. With the earnings yield for the S&P 500 dropping below 7% for the first time in 6 years, either earnings growth will accelerate, or the SP 500 will pullback 5% – 10%.

The bearish sentiment around the market along with the recovery in Japan and the stabilization of Europe, lead me to conclude that we will likely see the former (earnings growth improvement) to a greater degree than the latter ( a significant pullback). The SP 500 laps easier earnings comparisons in the 3rd and 4th quarter of 2013.

Financials, Consumer Discretionary, particularly housing-related, and Industrials are our sector overweights. Technology is a stock-pickers sector in this market.

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• Bespoke has noted the vast outperformance differential between those US companies with 100% US revenue and the large-cap global companies which get a big chunk of revenues from overseas, particularly technology which gets 50% of its revenues from non US markets. We think this could be in the early stages of changing. All the retail earnings reports this week will be a good tell. While we expect good numbers from most of the retailers, it will be the stock reaction that counts. Don’t forget “relative performance” within the index.
• Ryan Detrick, a great technician and a fellow Xavier alum, published a chart this week on market sentiment. One big reason we aren’t seeing a correction in my opinion. Love Ryan’s work. Here is another article from Twitter, that quotes two of my favorite research sources: Ryan Detrick and Bespoke. We became lifetime subscribers of Bernie Schaeffer’s, Schaeffer’s Investment Research in 2004. Great research center. Love the options, sentiment and technical analysis usage.
• Interesting tweet from Josh Brown on “extremes”.
• Both Schwab (SCHW) and JP Morgan (JPM) were up last week: SCHW was 3.5%, JPM +2.9%. Schwab is a “great rotation” and higher interest rate beneficiary. Big time. (Long SCHW, JPM)
• Looking for obvious beneficiaries of higher rates ? Schwab is one, the Chicago Mercantile Exchange (CME) is another. The CME’s largest contract by volume is still the Treasury complex, and they have a 99% market share of that business. Eurodollars too. In the 1980′s and 1990′s the stock exchanges like the NYSE and the Nasdaq ruled the roost. In the next 20 years, the commodity exchanges, with credit default swaps (CDS) and daily risk management (mark-to-market) will alleviate much of the counterparty risk we saw in the 2008 financial crisis. We like both CME and ICE, but prefer CME over the long haul given above. Still, acquisitions crushed CME’s ROE, which is now just 4% down from 30% from 2003 – 2007. ICE’s current ROE is 15%. (Long CME, ICE, SCHW).
• We dont think the pharma/staples trade is over. Merck (MRK), Pfizer (PFE), Amgen (AMGN) are correcting. We plan on adding to them if they get cheap enough (long all 3 names).
• It sure looks like the 33-year bull market in Treasuries is over, however from 2002 – 2007 we saw gradually rising rates. I was studying Money & Banking in 1980 at a small university in Cincinnati, Ohio when Volcker was conducting the great “monetarist experiment” and started targeting the money supply instead of interest rates. The prime rate spiked to 20% from then 12% and then went back down to 12% all in a period of about 2 years. The “energy crisis” under Jimmy Carter was in full swing. There were guys like Doug Casey writing books called “The Coming Great Depression” that were readily available in the school bookstore. And then in August, 1982 the Fed said that they were going to return to interest rate targeting, and the rest (in terms of the great stock bull market) is history. Remember, things (asset prices, valuations) can change in a hurry.
• We were buying the TBF this week, as a hedge for our investment-grade bond funds, despite “credit” still being cheap to Treasuries.
• Speaking of Norm Conley, another great graph on the trend-channel around the SP 500. Fits with the current bullish thesis. More room to run.
• Another good graph by Norm on EU credit spreads. I think Europe is stabilizing faster than a lot of folks give the continent credit for.  Ford (F) is one big beneficiary of Europe stabilizing and eventually improving. The planned re-structuring of Ford’s European operations, was expected to cost F $0.50 in EPS in calendar 2013. As of the April earnings report, Ford’s calendar 2013 EPS estimate was $1.40. The expected European drag in 2013 is 37% of that estimate. If Europe improves, Ford earnings should get a nice lift.
• Kevin Depew from Minyanville on the trend in jobless claims. Bullish.

To conclude, housing, US job growth, the 36% rally in the Nikkei and the eventual impact on the Japanese economy, the vast improvement in EU credit spreads, suddenly everything is looking better for global growth.

Final note: out last night in one of the Lincoln Park hot spots, just north of downtown Chicago, and wound up talking to three young folks in the US Armed Forces. Two young women, both fresh from the Air Force Medical Corp. and a younger guy in the Navy looking to get into dive school. The young women were eager to be deployed and couldn’t wait to be shipped out as they were approaching the end of their initial training. Even if the orders were Afghanistan they said they were eager to go. Bought them a round and thanked them for their service.  (The young women were calling me “sir”, which was just killing me, but that is far better than being called “Gramps”). Given what i saw last night, the US is in good shape. Couldn’t have been nicer, more professional, and polite warriors. Speaking of warriors, don’t forget Drexel Hamilton and their mission to hire retired and disabled American Armed Services Veterans. What a great mission…

We should title this stock market, “The Correction that Never Arrived”. The SP 500 has been overbought and at the higher end of the Bollinger Band range since January, 2013. Doesn’t really matter.

Thanks for reading and stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager