Higher SP 500 EPS Revisions are Great. The Price Action is Not.

The scariest thing I read this week (Thursday) is that Walmart was stopping the sale of guns and ammo due to concerns over “civil unrest” around Tuesday’s Presidential election but then on Friday, Walmart announced that Smith & Wesson and Sturm Ruger had resumed selling across Walmart stores.

Rarely do I get calls from clients – usually we email – but this morning i got a call from a long-time friend who is in the disaster recovery business, and he said that in the northern suburbs of Chicago there is a rush to get office buildings boarded-up and secured in advance of Tuesday’s election. Any commercial property that has immediate access to the I-94 West out of downtown and is easily accessible to the expressway is being secured.

Have we reached peak hysteria ?

It’s always hard to say.

The SP 500’s 5.5% drop this week is supportive of the “bomb shelter and canned goods” tape, but then you / we look at the 10-year Treasury yield, and wonder “where is the safety trade in Treasuries ?”

SP 500 Earnings:

It’s been a broken-record since Q2 ’20 earnings started around July 10th, but SP 500 EPS “revisions” look fantastic. Here’s a summary of Q3 ’20 – Q2 ’21 SP 500 EPS and revenue trends (changes in expected growth rates):

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Look at the jump in the “expected” growth rate of Q3 ’20 SP 500 EPS (column 1) and revenue (column 5).

Just like Q2 ’20, the 4th quarter of 2020 is seeing subdued revisions, which could mean that the Street is still reluctant to raise estimates ahead of actual results.

Forward SP 500 Earnings Curve:

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Look at the change in both the “sequential” and “4-week” rate of change in the SP 500 forward earnings curve.

The upward revisions are actually accelerating.

Looking at key SP 500 EPS metrics:

1.) The forward 4-qtr estimate this week rose to $158.32 from last week’s $157.10.

2.) The forward PE fell to 20.6x versus last week’s 22x on the 5% drop in the SP 500 this past five days

3.) The SP 500 earnings yield has risen to 4.84% or 4 consecutive weeks, not a surprise given the drop this week. The SP 500 hasn’t made a new high since it printed 3,588 on Sepetmber 2nd.

4.) The average, expected growth rate of SP 500 earnings for both 2020 and 2021 is back to 4%. For the last 31 weeks the expected average has been 4% with the exception of 3 weeks ago when it dropped to 3%.

5.) Looking at SP 500 revenue, there is an 80% “upside surprise” (or beat rate, per Refinitiv data) for the SP 500 components that have reported 3rd quarter ’20 revenue so far, which is about 60% of the index. Everyone’s talking EPS strength, but revenue strength and revenue upside is even better.

Summary / conclusion:

Between worries over a contested election and civil unrest, and then higher numbers around Covid-19, it’s amazing all American’s haven’t moved to Canada.

The SP 500 EPS revisions make a case for a higher SP 500 if this “macro” and the election weren’t staring us in the face.

This blog post from yesterday, talked about the prospects for higher corporate tax rates under Biden / Harris, and the cut to the SP 500 estimates for 2021 should the corporate tax return to 29%, would not be immaterial.

Personally, I think that’s the biggest risk for next year.

Tale all this with a substantial grain of salt. SP 500 estimates change daily.

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