11.18.13: Updating the SP 500 “Forward 4-Quarter” Growth Rate

A key metric not often understood, the “forward 4-quarter growth rate” is something we calculate using the ThomsonReuter’s “Forward 4-quarter” EPS estimate for the SP 500. (The forward 4-qtr growth rate consists of the EPS estimate provided by ThomsonReuters for the 4th quarter, 2013, through the 3rd quarter, 2014 period, and then we compare that EPS estimate to 52 weeks prior, and then calculate the y/y growth.)

It is something we started tracking years ago, to give us a better or “tweener” read on the SP 500 forward P.E estimates and ratio’s.

For example, calculating or using the SP 500 estimate for 2013 consensus EPS of $108.73 doesn’t seem that useful given that there remain just 6 trading weeks in the year. In other words, the 2013 year-end time horizon is too close, for useful valuation purposes.

Using the 2014 consensus EPS estimate of 2014 seems more reasonable given today’s date, but what if this were July 20th, and we wanted some intermediate data point between the calendar year-ends.

Here is the chronology of the “forward 4-quarter” growth rate for the SP 500 over the last few weeks and then from the beginning of 2013:

11/15/13: +7.54%

11/8/13: +7.40%

11/1/13: +6.93%

10/4/13: +6.04%

9/20/13: +7.30% (previous year’s high)

8/30/13 +7.12%

8/2/13 +7.14%

7/5/13 +5.16%

5/31/13 +4.38%

4/26/13 +3.89%

3/29/13 +5.84%

3/1/13 +6.50%

2/2/13 +6.22%

1/4/13 +5.77%

(Rather than cherry-picking data, I tried to select the week closes to the end of the month, when analysts would most likely update their models. The mid-September data points of 7.30% were shown to show the previous high for the year, prior to the last two weeks data.)

Datasource: ThomsonReuters EPS data, internal spreadsheet

Conclusion: with Friday’s, 11/15/13, +7.54% year-over-year growth, the “forward 4-quarter” growth rate has broken out to a high for the year, and if our expectation that 2014 EPS growth for the SP 500 could see 10% – 11%, then we would expect that the growth rate would continue to gradually move higher. But, we also need to see revenue growth and companies reporting “upside surprises”.

To support today’s SP 500 action, we’d like to see this growth rate start to accelerate. We’re also starting to calculate what is essentially the 4-quarter growth rate, which in this case would be the calendar 2014 EPS estimate, or 1 -quarter forward from the current Thomson forward estimate. How is that for confusing…)

We will update our 2014 SP 500 EPS expectations shortly.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

 

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