Per ThomsonReuters, the “forward 4-quarter” estimate on the SP 500 slipped $0.30 last week to $118.24 from $118.54 the week prior.
The p.e ratio on the forward estimate is now 14.8(x), slightly above the 10-year average p.e ratio of 14(x) per Factset.
The “earnings yield” on the SP 500 (the $118.24 forward estimate divided by the closing value for the SP 500 on 11/1/13) is 6.72%.
Importantly, the growth rate on the forward estimate rose to 6.93%, up from last week’s 6.66% and the prior week’s 6.19%.
Just on a PEG (p.e to growth ratio) basis, the SP 500 is trading at 2.15(x) PEG as of 11/1/13, which is inline with 2013’s weekly historical PEG ratio. The high PEG this calendar year was 3.71(x) in early May, 2013, and the low PEG was 1.97(x) in mid-August, 2013.
We received an email this week from Dale L. of Chestmoor Capital. Dale noted that the usually steady erosion in the quarterly growth estimate for Q4 ’13, has not occurred to the extent that it did in Q1 and Q2 ’13. This was a keen observation, and was part and parcel to our comment about the Q3 ’13 earnings growth estimate ending September at +4.6%, (when the y/y percentage growth number for quarters 1 & 2, were closer to 1% – 2% as the numbers started to get reported).
Factset does a great job of quantifying this phenomenon: from Factset’s Earnings Insight report dated November 1 ’13, “During the month of October ’13,…the Q4 bottoms-up EPS estimate dropped 1.5% during the month of October.” Factset goes on to explain that when compared to the trailing 1-year, 5-year and 10-year averages, this 1.5% drop was less than those various averages, with the point being that we are seeing less pressure on the 4th quarter estimate than is normally seen after one month.
T/R is looking for +9.2% y/y earnings growth in Q4 ’13, while Factset is expecting 7.2%. When all is said and done by mid-February of ’14, I expect the T/R growth rate to be above 10% for q4 ’13.
Again, this was an astute observation by Dale. What it means is there is less pressure on forward estimates in terms of percentage growth (as confirmed from Factset), even though analysts as a group remain conservative in terms of modeling forward quarters.
To summarize all this (in English), while we may not be seeing upward revisions to near-term q4 ’13 estimates and beyond, what we are seeing is less downward pressure on the estimates. Analysts are getting less negative or cautious.
Meaningful ? Personally, I think it is another small positive around the SP 500 earnings story. The fact that the forward growth rate is moving higher is another plus too.
Still, the SP 500 needs a 2% – 3% flush to work off its overbought state.
Q3 ’13 Earnings results – any surprises ?
Per ThomsonReuters, y/y earnings growth for the SP 500 is +4.2% as of November 1, ’13, inline with the +4.6% projected on October 1. Excluding JP Morgan’s legal charge, which has had the largest impact on both the SP 500 and the Financial sector as a whole, earnings growth is +6.9% per Thomson for the SP 500, and the Financial sector earnings growth is closer to 15%.
Here is the change in earnings growth expectations since October 1 (first column is November 1, 2nd column is as of October 1):
Consumer Discretionary: +10.1%, +7.5%
Consumer Staples: +5.2%, +4.9%
Energy: -7.9%, and -0.7%
Financials: +16%, +9.4% (excludes JPM charge)
Healthcare: +7.7%, +3.6%
Industrials: +7.5% and +5.2%
Materials: +4.6% and -0.3%
Technology: +8.4% and +3.3% (Per Factset, ex-Apple’s drag on the sector, Tech would be +12% as of Nov 1)
Telco: +8.5%, +7.6%
Utilities: +1.9%, +0.8%
SP 500: +6.9%, +4.6%
We have to be careful not to mix and match estimates between ThomsonReuters (T/R) and Factset. Factset’s estimates tend to be lower than Thomson’s, on a percentage basis. To be fair, Factset does a better job of clarifying one-time events and providing readers with color around the numbers, as opposed to Thomson’s more direct data.
Revenue growth (per T/R) is +3.3% for q3 ’13, a little stronger than expected as of October 1, but still low single digits. Very little has changed in that regard.
Basic Materials is looking very good in our opinion. Just like clockwork, as soon as Alcoa was dropped from the Dow Jones, it reported an 80% “upside” earnings surprise, a revenue beat, and the stock rose 17% in October ’13 alone. Freeport (FCX) and US Steel (X) rose 11% and 20% during the month of October as well. Basic Materials is tied to global growth and that looks like it will get stronger in 2014. We are overweight Basic Mat in a number of client accounts. (Long all 3 names.)
Energy is still not trading well. Basic Mat – at least the non-gold miners – bottomed in late June, early July, if you look at Alcoa, Freeport, US Steel, Cliff Natural Resources, etc. Exxon and Chevron reported this week, and although Exxon traded a little better following the Thursday morning earnings release, Chevron didn’t trade well after reporting on Friday. The stocks will start to trade better before the earnings estimates change. We remain underweight Energy.
3 of our top 4 holdings remain Financials.
Conclusion: SP 500 earnings continue to be a “good but not great” story, certainly with growth far slower than we saw in the late 1990’s. But the reasonable p.e ratio, and the SP 500 cash generation is resulting in a lot of positives for corporate earnings. The next major upside catalyst will have to come from revenue growth, but that could be a few years away. We still think, given the above commentary that Q4 ’13 could see 10% earnings growth for the SP 500, or the best quarter of earnings growth since early 2012. However that just means that 2013’s full year earnings growth will be just 6% – 7%, in line with the post WWII average of 7%. The SP 500 remains overbought – we are still looking for a good 3% – 5% flush in the benchmark. We also still like Financials, particularly JPM, Schwab, and GS. Goldman is recovering from its post-earnings drop, and doing so nicely.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA