5.18.13: SP 500 Earnings Update: SP 500 P.E Ratio now Expanding – Highest Since 2009 – Return of Global Growth ?

We have our first CNBC appearance on Monday morning, May 20th at 9:15 am central time (approximately). We’ll be talking Home Depot and Lowe’s (but primarily Home Depot) on CNBC’s Big Data Download segment. Both retailers report fiscal Q1 ’14 earnings this week. (Many thanks to CNBC’s producer Christina Scolaro for the invite. Hope I justify that confidence.)

We’ve fixed the technical issues with this blog’s problems around linking graphs and charts. Sorry about that. If you have had a problem clicking through to our attachments, keep trying. Should work now.

Last correction: Thursday’s blog post on Cisco is a MONTHLY chart. Headline says weekly. Either way it is a good looking chart.


Judging by the market rally this year, SP 500 earnings do not seem to matter much to the overall market backdrop, as the SP 500 rose another 2% last week, and over 16.5% year-to-date.

Meanwhile, Q1 ’13 earnings are up 4.8% over Q1 of last year, while revenue growth remains flat year-over-year. Expect y/y earnings growth to improve as we move through 2013, thanks to easier “comparisons” against the 2nd half of 2012.

Revenue growth is still an issue.

For 2013 as a whole, current ThomsonReuters estimates expect 7.6% year-over-year growth, for the SP 500, down from an expectation of 10% growth as of January 1, 2013.

The best sector in terms of earnings growth remains Financials, which grew earnings 18% in Q1 ’13, well ahead of all sectors except Telecom’s 15.6% growth.

The forward 4-quarter earnings estimate is now $113.56, down a penny from last week’s $113.57. 463 of the 500 companies in the benchmarket have reported Q1 ’13 results, per ThomsonReuters.

The p.e ratio on the forward SP 500 estimate is now 14.68(x).

The earnings yield is now 6.81%.

The year-over-year growth of the forward SP 500 estimate is now 4.05%. That is a key metric and has remained relatively flat the last 4 weeks.

We dont have much to add statistically or otherwise: the forward p.e ratio on the SP 500 is now the highest (according to our internal spreadsheet) at 14.68(x) since the 2009 market low. The average P.E ratio over secular bull markets is typically 17(x) earnings, and the stock market typically peaks at 25(x) – 30(x) earnings. We are still well short of average in terms of “p.e reversion”, but the world is different now too.

Over the shorter-term time frame, the stock market seems stretched relative to Bollinger Bands, the standard deviation from the 50-day moving average, and the numbers of sectors with a high percentage of overbought names, but it doesn’t seem to matter.

My own opinion is that when the market sees “p.e expansion” it usually portends good things. The market p.e only expands during periods of economic stability or growth.

Bespoke, when comparing today’s 2013 stock market to history, thinks today’s action is most similar to the 1995 stock market, a year when the SP 500 returned 34.11%.

Interesting stat: in late April, in Bespoke’s weekly summary published later on Friday nights, they noted that SP 500 companies with all predominantly US-revenues (i.e. labeled Domestics) had outperformed those SP 500 companies where a good percentage of their revenues were non-US, (i.e. labeled Internationals), by a whopping 1330 basi points or 13.3% (as of that publication data in late April ’13). I think this could be in the early stages of changing. Japan is in the early stages of reigniting their GDP, and Europe is now stable (see credit spreads graph below). See the graph/chart below from Helene Meisler, a technician on TheStreet.com (TS) on China. The large-cap internationals, which is the Technology sector to a large degree, should start seeing p.e expansion.

Global growth here we come…


Here is our Home Depot (HD) and Lowes (LOW) earnings previews as found on SeekingAlpha. Both companies report this week. LOW is slightly cheaper on a valuation basis, but HD has been executing superbly. My own opinion is that both companies are fairly valued. However in a market where p.e’s are expanding, selling because of valuation becomes a lesson in frustration. (Long HD and LOW, more HD than LOW)

Friday morning it was announced that EU car sales rose for the first time in 19 months. Ford (F) had a huge week, up 6.87%. Remember, a point I’ve been making ad nauseum on Twitter, is that Europe is expected to cost Ford $0.50 in earnings per share (EPS) in 2013. Ford management has guided to that $0.50 drag on earnings. Ford is expected to earn $1.40 for full-year 2013. Any kind of better Europe news for F, relative to their operations, adds materially to earnings.

Financial stocks remain steady outperformers: Financials are 17% – 18% of the SP 500 by market cap, 2nd only to Technology as a percentage of the SP 500, which is 18%. Our top 3 holdings are Schwab (SCHW), Goldman Sachs (GS) and JP Morgan (JPM). Long all 3 names.

Wal-Mart (WMT) reported earnings Thursday morning that seemed poor on the surface. Pretty poor guidance too, which is typical for the retail giant. Here is an article from Retail_Sails that seems too pessimistic. The fact that these articles keep coming out tells me being long WMT is a good bet. Would buy a pullback to low $70’s, but not much of a drop Thursday despite bad news. The biggest negative to WMT is the $475 billion in annual sales, and the market cap. Law of large numbers.

Two big interest-rate beneficiaries from the coming “great rotation” are Charles Schwab (SCHW) and the Chicago Merc (CME). Here is a chart from Gary Morrow (@garysmorrow) on CME’s recent action. Action in the Treasury market goes hand in hand with CME trading action. Here is an article we wrote on Schwab, now about 8 months old on how Schwab benefits from higher interest rates. Here is a similar article on CME. (Long SCHW and CME.)

As long as we see articles like these, there is little to worry about in terms of market sentiment. Two articles on SeekingAlpha today too about a bubble in the US stock market – are you kidding me ? We JUST finished a 13-year period of flat SP 500 values, interspersed with two vicious bear markets, the 2nd being the worst crisis to hit the US banking system since the Great Depression.

Last week, we thought the 30-year Treasury rally was done. Didn’t know that Bill Gross made the same call last week as well. The March ’13 high for the 10-year Treasury was 2.09%. If we take out 2.09%, the next stop is the early, 2012, high of 2.40%. The one caveat to this call is that everyone is looking for it. So many are expecting higher rates, as so many have been bearish stocks.

Treasuries have been the last asset class in the 13 year bull market that started in March 2000, to remain intact today. Gold, commodities, the dollar, Apple (AAPL), emerging markets, just about any asset class that outperformed in the period from March, 2000 through August, 2011 has now broken down, except Treasuries. (Long AAPL)

PC Sector: here is an article we wrote on October 4th, 2012 on this blog on the PC sector valuations. The 4 stocks we cited are all trading at higher prices. We are long MSFT, INTC, and a small position in HPQ, who reports this week. Absolute valuation matters. It is relative valuation that gets tricky.

This Fed Governor has it exactly right…

Norm Conley, money manager in St Louis with a graph of Eurozone bond spreads. Fitch upgraded Greece this week from CCC to B-, still very risky junk, but a credit upgrade nonetheless. Who saw that coming ? Europe may be improving faster than many think.

I got to know Helene Meisler’s technical analysis work when we both contributed to Jim Cramer’s TheStreet.com. Great chart on China, and Helene notes that “everyone hates this particular market”.

Finally, good piece from Bob Brinker’s Twitter link on SP 500 earnings, citing a WSJ article. We’ve heard this a while now. The catch is that faster revenue growth will offset some of the margin contraction we might be expected to see in a rapid US or global expansion. As companies add payroll, presumably it should be offset with more business or better revenue growth.

Our client portfolios remain overweight Financials, and Technology. Industrials is a sector we like and need to lift exposure to (wow, has GE lagged), to get exposure to global growth. We added the TBF this week, in anticipation of the Treasury market being the next shoe to drop. We are hedging our overweight to credit risk in balanced / bond accounts, with the TBF. (Long TBF, GE).

Thanks for reading and stopping by. As Hyman Roth said to Michael Corleone in “The Godfather II”, “This is the business we have chosen”. Hopefully you found something worthwhile in the above commentary.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio Manager

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