According to ThomsonReuters, the “forward 4-quarter” earnings estimate for the SP 5oo ended the week at $115.09, down just a smidge from last week’s $115.14.
The p.e. ratio on the current $115,09 estimate is 13.5(x), consistent with the last few quarters valuation.
The SP 500 earnings yield is 7.40%.
The year-over-year growth of the forward estimate has slowed to 4.76%, down from its peak of 6.24% in late January, ’13. In fact, the forward estimate has lost about 100 bp’s of growth in just the last 5 weeks, which I do think is somewhat of a caution flag.
We don’t want to see year-over-year growth fall much below 3%, and would prefer that it bottom shortly and start to tick higher once again.
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The tongues are wagging in the mainstream financial media about the revenue growth of SP 500 and how revenues are coming in relative to expectations.
While 70% of the SP 500 companies are beating earnings per share expectations (per ThomsonReuters), just 44% are beating revenue expectations, also per “This Week in Earnings”.
This is a topic that could spin-off into a number of different areas, but the fact is SP 500 revenue growth is weak, because the US is suffering a weaker recovery off the 2008 – 2009 recession, and that remains the case today.
Stat of the week: Sector Revenue Growth: (The following table is SP 500 revenue growth by sector for q3 ’12 (as of Dec 21, ’12, last column), q4 ’12 (as of March 28, 13, 2nd column) and the q1 ’13 quarter (as of Friday, April 19th, 2013, 1st column)
Consumer Discretionary: +5.1%, +5.0% and +2.9%
Consumer Staples: +1.6%, +3.4% and +1.6%
Energy: -10.8%, -10.8% and -14.7%
Financials: +2.9%, +20.7% and +0.5%
HealthCare: +6.5% +7.7%, and +5.0%
Industrials: +0.3%, +2.2% and +1.4%
Materials: -0.4%, +0.1% and -5.2%
Technology: +3.8%, +5.5% and +3.3%
Telco: +1.4%, +3.1% and +2.7%
Utilities: +7.3%, +4.7% and +0.2%
SP 500: +0.7%, +3.6% and -0.8%
What is interesting about the above table, is that it could explain the strength in Utilities, which is the only sector to see steadily improving revenues over the last 3 quarters. The XLU (utility ETF) is up 17% year-to-date as of Friday, 4/19 – are you kidding me ? It has one of the lowest rates of “earnings” growth of the 10 sectors within the SP 500. The last time Utilities outperformed like this was 2011, a year of incredible turmoil. Ute’s are only 3% of the SP 500 too. Very small weighting.
The fact is the “earnings per share” number is far more subject to control by an SP 500 component (i.e. a company’s management team) than the revenue number. Revenue generation requires a customer / client to buy a product or service. Earnings per share can be controlled with expense management, etc.
To conclude, revenue growth and capex growth within the SP 500 remain weak. What changes this, is hard to tell right now. The US housing and auto recovery are good signs, but every time the US economy seems to gather some momentum, it then stalls out for 6 months.
What gets US corporate managements more aggressive about investment in the future remains a long-term question mark.
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Our Apple trade was terrible. The longer-term chart looks broken. The uptrend off the ’03 low is now broken, after last week’s drop below $419, or the March 4th low. Not good.
Is the long-term macro trade ending ? From the Nasdaq peak in March of 2000 until just recently, here was the macro trade:
- Flat to short SP 500 (large-cap equities)
- Long GOLD
- Long Treasuries / interest rates / intermediate bond funds
- Short the dollar
While not decisive, here is the current take:
- SP 500 (all-time high), in last 2 weeks;
- Gold/silver/commodities look ugly
- Treasuries – the 10-year Treasury hasn’t made a new low yield since late July ’12
- Dollar is starting to strengthen
What really piques my interest is that Apple bottomed at the approximate point of the technology bear market bottom in March, 20003. IBM has been a stalwart since the ’09 market low, both stocks greatly outperforming the overall tech sector.
How do Apple and IBM look now ? Yes, not so hot. (Long AAPL, IBM)
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Norm Conley of JA Glynn out of St. Louis tweets on the outperformance of the consumer staples sector. He has a point. All the “bond proxies” as ISI Group calls them, which are stable, consistent earnings growers with nice dividends, are scorching hot (again), which includes names like Verizon (VZ), and large-cap pharma.
Another great graph by Norm on the relative valuation of Utilities and Consumer Staples, and the extreme P.E ratio’s. Naturally since we are underweight both groups and havent owned a utility in years, I’m not happy about this.
Great calls by ISI Group’s John Mendelson, and Dr. Mark Schoenebaum on the large-cap pharma group. Been strong outperformers for a while, since late 2011, early 2012. (Long PFE, MRK, AMGN)
GE laid an egg on Friday, down 4% on its earnings report. Havent looked at the numbers. Will Tim Cook be to Steve Jobs, what Jeff Immelt, was to Jack Welch i.e. the successor to an inconic corporate leader, that never quite got it done ? (Long GE, AAPL) Honeywell was up sharply on Friday, GE down 4%. Conflicting views on Europe.
168 SP 500 companies report this week, and by the Friday, April 26th, about half the SP 500 will have reported q1 ’13 results. Earnings are not the issue. I do think by mid-May we see +4% – 5% earnings growth for q1 ’13. Revenues need to start growing at least mid single digits once again, or job growth will continue to be subdued.
Intel and Microsoft, two long-thought-dead PC plays, had a good week. Both stocks were up 3.5% on the week. MSFT’s technical posture looks a little better than INTC’s.
IBM is sitting on its trendline off the 2009 market low. IBM cannot trade much lower this week.
Seaworld (SEAS) was a successful IPO on Friday. Congrats to Drexel Hamilton, the US Armed Forces, veteran-led firm that was part of the Seaworld IPO group. Drexel gives a part of their commission to WoundedWarriors, and hires many disabled and other veterans. Great firm, great mission.
We still like Financials as an overweight sector.
We still think the pessimism around the US stock market is too grim. Will the 2010, 2011, 2012 mid-year correction pattern repeat in 2013 ? It is too obvious now.
Thanks for reading and stopping by:
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager
312-810-3480