While having breakfast with a client this past week, someone who has been a client since the late 1990’s, I’m always impressed with different client reactions to volatility and market returns. It was exactly three years ago this week – Q4 ’18 – when the SP 500 was in the midst of correcting 20% – 25%% for the quarter, the SP 500 was finally catching up to the Yellen and Biden fed funds rate hikes that began with Yellen in Q4 ’16. It was the day after Christmas December 26, 2018, when the SP 500 opened lower and then rocketed higher to close the quarter well ahead of its rate of decline through the first 10 – 11 weeks of Q4 ’18. Jay Powell softened his monetary policy stance shortly after the New Year, even though his mid-December ’18 presser was very “hard-money” like. (The actual SP 500 return for Q4 ’18 was -13.83%, but it was headed for a much sharper decline until the last 10 days of the quarter. )
So, what’s the point ? Talking to this client this week, I realized that It’s very likely more money (or rather wealth) is lost (from an opportunity cost perspective), from being out of bull equity markets that is likely ever lost being invested through bear markets.
This client is / was unusual though. She even told me once, “I don’t mind seeing my accounts decline when the market is declining, but what I do mind is seeing my accounts remain static during uptrends”.
Anyway this SP 500 earnings preface was a preview to thoughts on 2022 which I suspect will be all about Powell and the Fed. With Q4 ’21 GDP expected to print in the 10% range, and mainstream media talking rate hikes already, 2022 could see a repeat of 1994 when Greenspan raised rates 6 times, the SP 500 grew EPS 20% y.y, and the SP 500 returned 1% for calendar 1994.
My own opinion is Powell’s Wednesday, December 15, 2021, presser will carry some freight with the US bond and equity markets.
SP 500 Earnings data:
- The forward 4-quarter SP 500 EPS estimate this week came in at $215.87, down $0.10 from last week’s $215.97, but up $2 from the $213 forward estimate on October 1 ’21. This is prime evidence that the 2022 SP 500 EPS (estimates and actual) will not see the same rate of growth as the 2021.
- The PE ratio is 21.8x given the record high SP 500 close on Friday, December 10th, 2021.
- The SP 500 has returned 27% YTD as of December 10 ’21.
- The Q3 ’21 bottom-up EPS estimate is $53.89 with two weeks left in the quarter. Personally I thought we’d see “$55 plus” by 12/31.
- The Q4 ’21 EPS estimate of $51.14 compares to $51.08 on 10/1/21, which isn’t unusual. The SP 500 “upside surprise” factor should also return to normal in 2022.
Quarterly growth rates:
This data – sourced from Refinitiv’s Earnings Scorecard – shows the longer look at y.y growth trends for SP 500 forward EPS and revenue.
Q4 ’21 looks fine, as does Q1 ’22, for which we will get the guidance for Q1 ’22 and all of 2022 with Q4 ’21 earnings releases starting January 10 or so.
Summary / conclusion: Updating the numbers on the spreadsheet above, show no indication (yet) that 2022 holds an issue for SP 500 earnings or revenue. With Q4 ’21 GDP expected to grow 10% per some estimates, earnings or revenue growth aren’t likely to be the issue.
The year 1994 might be an analog for what 2022 holds if Powell’s earlier statements are any indication.
In fact it was 2018, when the SP 500 last saw “PE compression” which means that SP 500 earnings grew 23% for the year, while the SP 500 returned -4.35% for calendar 2018.
Years of PE compression typically occur when GDP is strong, inflation worries are high, SP 500 earnings are also strong and healthy, and stocks drift lower thanks to the Fed.
None of this is a prediction, just thinking out loud. Readers should take everything they read about the capital markets with a grain of salt and healthy skepticism.
Thanks for reading.