9.14.13: SP 500 earnings update: Ignore Taper concerns – “Forward 4-quarter” Growth Rate Hits Highest Level Since Q1 ’12

Per ThomsonReuter’s This Week in Earnings, the “forward 4-quarter” earnings estimate for the SP 500 rose $0.02 this week to $115.71.

The p.e ratio on the forward estimate rose to 14.6(x).

With the SP 500’s 2% rally this week, the earnings yield on the SP 500 fell to 6.85%.

Most importantly, the forward growth rate of the forward estimate rose to 7.30% exceeding the previous cycle high of 7.28% on August 23rd, and the highest rate of expected growth since the first quarter of 2012.

The Trend:

9/13/13 = 7.30%

6/14/13 = 5.06%

3/15/13 = 5.98%

1/14/12 = 4.85%

9/14/12 = 2.36%

8/3/12 = 1.03% (the bottom)

6/15/12 = 4.13%

3/16/12 = 6.96%

12/16/11 – 11.05%

The above table is from our internal spreadsheet, and shows the year-over-year growth rate of the forward estimate for the middle week of the last month of each quarter, as 9/13/13’s estimate was.

The earnings progression off the 2008 financial crisis low near $60 was that a huge productivity boom following the Financial Crisis helped SP 500 earnings recover rapidly (thanks primarily to lower job growth ) and continue from late 2009 through late 2011, and then we saw a slowdown in the growth rate starting starting with Q1, ’12, which bottomed in the first week of August, ’12,when the forward growth rate reached just 1%.

Today’s forward estimate of $115.71 is a 93% increase off the late March, 2009, low of $59.80, and the forward growth rate has been slowly accelerating since August, 2012.

Since March, 2009, the forward earnings estimate for the SP 500 has risen 93%, while the SP 500 has increased 153%, the only evidence you need that there has been p.e expansion for the SP 500, but it really has been modest at best.

With 496 of the SP 500 having reported q2 ’13 earnings, the final results show 4.8% y/y earnings growth for the SP 500 driven by 2.1% revenue growth.

Q3 ’13 earnings expectations:

ThomsonReuters is currently expecting 4.3% earnings growth for the SP 500 for the 3rd quarter, 2013, while Factset is expecting 3.2%. Factset’s numbers typically run behind or lower than ThomsonReuter’s data, at least as long as i have been tracking the two together, which hasn’t been that long. We’ve always used ThomsonReuters data given that First Call was the gold standard for analyst consensus in the 1990’s, and 2000’s although there are now several other services (ThomsonReuters, Factset, Zack’s, etc.) posting consensus earnings and revenue estimates.

Q3 ’13 Sector ranking by expected earnings growth:

Financials: +10.5%

Cons Disc: +7.3%

Industrial: +5.5%

Cons Spls: +5%

SP 500 +4.7%

Healthcare +3.4%

Technology: +3%

Utilities: +0.5%

Materials +0.8%

Energy: -1%

We left Telecom out of the group since only 6 companies remain in the sector. Standard & Poor’s should really fold telco into technology and leave the remaining 9 sectors.

* Source: ThomsonReuters

 Q4 Sector ranking by expected earnings growth:

Financials +26%

Industrials: +17.2%

Cons Disc: +14%

Materials: +13.4%

SP 500 +11.1%

Health Care: +8.2%

Technology: +7.8%

Cons Spls: +7.1%

Energy: -1.8%

Utilities: -3.8%

* Source: ThomsonReuters

The top 3 performing sectors year-to-date have been Healthcare (led by Biotech), Consumer Discretionary, and Financials, even though Financials have had the best earnings growth of any sector all year.

The aspect of stock or sector investing that earnings data doesn’t capture is “market cap” since the SP 500 is a cap weighted index.

Conclusion: Client money continues to remain invested in equities, overweight to the standard 60% / 40% typical asset allocation, throughout most client accounts, and we do think the SP 500 and the US equity market are headed for a strong 4th quarter. On Friday, Sept 14th, the SP 500 closed within 22 points of its early August all-time high of 1,709. One of the reasons I suspect the SP 500 is having a problem breaking out of its consolidation since the May and August highs is that SP 500 earnings growth remains just average at an expected 6.3% growth rate for full-year 2013, in line with the post WW II average of 7%, and interest rates are rising.

We expect the 4th quarter, 2013 will be a good quarter for equity returns, with Financials leading the way. Stay with capital market sensitive financials like GS, SCHW, JPM, CME and MS (long all but MS). Although we wont start getting 4th quarter numbers until early January, 2014, we do expect Q4 ’13 to be the best quarter of the year in terms of earnings growth, and it could be the first quarter, in 2 years, where year-over-year earnings growth is 10% or better,

FedEx Corp (FDX) and Oracle (ORCL) report this week, and both have August quarter end’s, so we will start to get a look at the first 2 months of 3rd quarter with their results. FDX is an international freight company and ORCL an enterprise software firm, so we could actually get a look at a decent cross section of the SP 500 given their respective customer bases. (long both FDX and ORCL)

(Sp 500 earnings and revenue data is rich with information that can be useful to an investor. In the coming weeks and months, I intend to show the data in new formats and dissected in different ways so that its usefulness becomes readily apperent to the reader. If readers have any suggestions, comments or criticisms, don’t hesitate to reach out at brianglm@trinityasset.com.)


Consumer Staples trade: here is our SeekingAlpha article on oversold Consumer Staples stocks. Both PG and WMT were up 2.5% on the week. We bought all 3 on Monday, Sept 9th. I think the trade still works.

Dow 30 Rejects: Here was our article on the 3 stocks ejected from the Dow Jones Industrial Average. We added to all three this week. HPQ is trading at 5(x) cash-flow.

Sentiment Very Bullish: In his CNBC appearance with Maria Bartiromo on Friday, Sept 13th, Ryan Detrick referenced this data or article showing how when AAII bears get above 40, it tends to portend favorably for the market. I remember how bullish the CNBC’ers were in the tech meltdown during 2001 and 2002, when “the economy” was still pretty strong, even after 9/11. Sentiment is such a HUGE contrarian indicator. Ive learned the hard way through the years to ignore it at my own peril. One of my fellow contributors at TheStreet.com for years, was a guy named Jordan Kahn, who runs KAM Advisors. His investing model is three-pronged:

  1. Fundamental analysis
  2. Technical analysis
  3. Sentiment

What a simple and absolutely brilliant methodology. Schaeffer’s Investment Research uses something similar but mainly technical and sentiment as the 2-pronged, rather than 3-pronged approach.

Trinity’s approach has evolved over the years from straight fundamental analysis (only) to incorporating technical analysis with fundamentals to identify higher-probability buy and sell decisions (and we really use technicals today, more than ever for clues to when to sell a position) and thanks to Jordan Kahn and Schaeffer’s, we try to incorporate sentiment into the equation as well, particularly when looking at overbought and oversold extremes. We look at percentage and number of analyst ratings and whether they are buy, hold or sell, and we also watch the put/call configurations to see how sentiment is configured, particularly around earnings reports.

Look at our earnings summary above, and combine it with Ryan Detrick’s comments on sentiment, and we have a potent cocktail for a strong 4th quarter, for the US stock market.

Norm Conley of JA Glynn shows a relative valuation chart of SP 500 over a long period of time. Not sure I understand the NIPA line. Need to do more homework. Jeff Miller over at “A Dash of Insight” and NewArc Capital, has talked about Schiller’s CAPE (cyclically-adjusted P.E ratio) model and poked a few holes in it. I see that the NIPA is BEA-based or from the Bureau of Economic Analysis. I’ve just never seen it before. Again, need to do more homework on it. What I typically do when faced with two data series like this is split the difference. I still think the SP 500 is reasonably valued, and certainly not extremely-valued or overvalued to the extreme.

If you are wondering where we are getting the “7% long-run, post WW II earnings growth” number we’ve used the last few weeks, Norm posted this graph last week. I just realized NIPA must be National Income and Product Account. We currently don’t read BEA analysis, but it looks like we should.

Jeff Kleintop of LPL Financial notes a H.4.1 report this week from Fed, shows that the Fed balance sheet grew at its slowest rate since mid-January. Kleintop asks, “Tapering already ?”

Intel’s weekly chart looks very good. (Long INTC.)

I was hoping Microsoft’s analyst meeting on Thursday would be a big deal, and feature a bigger return of that cash to shareholders, but with the Ballmer announcement and then the Nokia acquisition, my guess is there is little new that will be heard. Supposedly ValueAct might be inclined to talk MSFT into adding debt to be used for a share repurchase or ASR (accelerated share repurchase), but now I’d be surprised if it came this quickly. The dividend will likely be increased a paltry 3% or so, and there will be a share repo announcement, but nothing out of the ordinary historically. Technically MSFT still looks good. Would buy more near $31. (long MSFT)

Summary: we remain overweight equities, especially Financials, and don’t anticipate too many changes into year-end. The big questions revolve around our fixed-income allocation, the TBF (Inverse Treasury position), the municipal bond closed-end funds, and our HYG trade. Will the 10-year Treasury break 3% and when will it do so ? The TBF is like an option: the direction and timing have to be right. We may end up selling the TBF and taking the gain. It is very tough to make money on the long side in a down-trending market like Treasuries, and the TBF has a time decay component to the ETF.

Thanks for reading and stopping by:

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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