4.7.13: SP 500 earnings update: Forward Earnings Estimate Now at All-time High / Q1 ’13 Earnings Start This Week

The “forward 4-quarter” earnings estimate for the SP 500 is as of April 5th, 2013, $115.25, a record high for the key benchmark.

The SP 500 is trading at 13.5(x) that forward estimate.

The earnings yield on the SP 500 is 7.42%.

The only negative we see is that – despite the record print in the forward estimate – the year-over-year growth in forward earnings has slowed to 5.19%, after peaking at 6.24% in late January ’13.

This is a yellow light in terms of the SP 500 and its ability to make new highs.

Current consensus is expecting 1.5% growth from the SP 500 for Q1 ’13 earnings.

Our expectation is that estimates for Q1 ’13 are currently too low (again) and that when the quarter is concluded by mid-May, the actual growth will be closer to 3% – 5%, which should then start to lift the year-over-year growth in the forward estimate once again.

We start q1 ’13 SP 500 financial results this week, with Alcoa (AA) on Monday, and then Wells Fargo (WFC) and JP Morgan (JPM) on Friday, April 12th. Bed, Bath (BBBY) reports Wednesday, April 10th.

Stay with Financials: (Stat of the week):

Financials are the only sector that has shown a steady increase in earnings estimates since Q1 ’13 earnings estimates started getting published last July 1, 2012.

Here is the progression in expected earnings growth for Financials since last summer:

April 5th, 2013: +11% (estimated)

April 1, 2013: +11% (estimated)

Jan 1, 2013: +4.3% (estimated)

Oct 1, 2012: +7.1% (estimated)

July 1, 2012: +8.6% (estimated)

The other 9 sectors of the SP 500 have seen downward revisions since last summer, with Materials being the heaviest negative revisions, from 23% expected growth as of July 1, to just +2.2% as of April 5th, 2013.

With a recovery in housing, and decent capital markets, and the banks having more capital to repurchase stock, even in a tough market we think bank stocks will outperform.

Stay with Financials. JP Morgan and Wells Fargo report Friday morning, April 13th.

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We sold about 80% of our Amgen (AMGN) stake on Friday, swapping some into Facebook (FB). Some of these healthcare charts have gone parabolic. Amgen would still be intact technically if it traded all the way down to the mid $80’s. (Still long some AMGN, and bought some more FB this week).

We think FB will make another run at its IPO high above $40, before all is said and done. (Long FB)

We were fortunate enough to attend a Textron dinner here in Chicago sponsored by Drexel Hamilton. Drexel Hamilton is a firm that employs disabled US veterans, and from what I understand, gives a portion of their commissions to the Wounded Warriors and other agencies, and not-for-profits, supporting wounded and disabled American veterans. Such an admirable cause, and a great effort on the part of the Drexel. I wish we were of the size to contribute materially to their efforts.

Here is our Alcoa earnings preview. While the valuation looks interesting, all of the commodity stocks trade poorly. Let’s see what Klaus can conjure up for q1 ’13. We’ve been long AA as a deep value play since ’09. It has been a gigantic underperformer. (long AA)

Here is our JP Morgan and Goldman Sachs earnings previews: Both stocks have begun correcting already. (long JPM and GS)

Which is our favorite large-cap bank ? Bank of America (BAC) – huge play on housing and the mortgage mess. They are still working through their issues too. (Long BAC, waiting to get longer at lower prices.)

Nice rally in Treasuries this week. The 10-year Treasury ended 2012 at roughly 1.75% – now below that.

Best Buy (BBY) is no longer the RIMM of retail – the stock has recovered nicely. Like the new initiatives. The fact that the dividend was never cut was the key. We sold our last position in the high teens, about a year ago. Just watching it now. (none)

Jeff Miller’s A Dash of Insight is a must read every weekend.

The biggest negative we see around SP 500 earnings today is the declining rate of the “year-over-year” forward estimate. We need to see that gradually increase over time, to keep a bid under the market. (See the first few paragraphs.)

Thanks for reading and stopping by. This is technical stuff, but earnings are a major valuation metric for today’s stock market. (I continue to be shocked by the overall negative sentiment I see and hear on CNBC, and across the blogosphere and Twitter, and yet on any pullback the SP 500 seems to quickly find a bid.)

We are tactically overweight equities in client accounts with a 60% / 40% or 70% / 305% asset allocation. We remain overweight credit risk in fixed income / balanced accounts.

We are looking at oversold stocks as we head in Q1 ’13 earnings. Will have more on that this week.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

312-810-3480

 

 

 

 

 

 

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