11.23.13: SP 500 Earnings Update: 2014 SP 500 Earnings Growth Should be Stronger than 2013’s 7% – 8%

Per ThomsonReuters, the forward 4-quarter estimate for the SP 500 fell $0.16 last week to $117.72.

The p.e ratio on the forward estimate rose to 15.3(x), which is consistent with the 2.0(x) PEG we’ve rotated around all year.

The earnings yield on the SP 500 fell to 6.52%, the lowest earnings yield we’ve seen in quite a while.

The y/y growth rate on the forward estimate rose to 7.57%, versus the prior weeks 7.54%.

This data is getting less useful as we see continued “p.e expansion” in the SP 500. Earnings growth for calendar 2013 will likely come in around 7% – 8% (which includes JPM’s operating eps for the 3rd quarter, and NOT the litigation EPS) so a 26% return on the SP 500 has a lot of folks puzzled, including myself.

However in 2011, the SP 500 earnings grew 15%, and yet the SP 500 was only up 2% – 3% on the calendar year, thanks to Greece, the debt limit stand-off, and then the recession call by ECRI that never materialized.

2013 is the first year of genuine robust p.e expansion since 2009, when both earnings and the SP 500 bottomed and turned higher. (In 2012, there was a little p.e expansion since SP 500 earnings grew 6% and the SP 500 returned 15%, but 2012’s earnings were influenced by Bank of America’s writedowns.)

2014 SP 500 Earnings Expectations – 2 sectors stick out

With just 5 weeks left of trading in 2013, we’re starting to keep an eye on 2014 estimates and two sectors have shown positive upward revisions to growth estimates for 2014: Financials and Energy.

Both sector’s revisions have surprised me since I thought Financials would peter out in terms of revisions next year, as loan loss reserves are chewed through and Energy has traded heavy thanks to crude inventories and declining gasoline prices.

Here is how the revisions have occurred over the last 4.5 months for 2014 earnings expectations for Financial and Energy:

Financials: expected 2014 earnings growth

11/22/13: +11.2%

10/1/13: +9.3%

7/1/13: +9.3%

Energy: expected 2014 earnings growth

11/22/13: +12.7%

10/1/13:+10.7%

7/1/13:+9.6%

There has been a 300 basis point increase in Energy estimates (per Thomson) since July 1, for full-year 2014 Energy sector earnings growth.

The other 8 sectors have seen slight negative revisions, which is normal.

Full-year 2014 earnings growth for the SP 500 is expected at 11.2%, so right now Energy and Financials are looking at better “relative” earnings growth.

Again it is still early and we won’t get hard 2014 guidance until January earnings reports, but these are the trends right now.

Finally, what did 2013 sector  estimates look like around the third week of November, 2012 ?

The first column is the actual YTD 2013 sector earnings growth as of 11/22/13. The 2nd column is the expected sector earnings growth for 2013, as of 11/23/12:

Cons Disc: +12.5%, +14.2%

Cons Spls: +5%, +9.7%

Energy: -4.4%, +4.3%

Fincl’s: 17.8%, 14.7% (the 17.8% should be +22% – 23% if JPM’s litigation charge is excluded)

Hlth Care: +0.5%, +7.0%

Industrials: +6.4%, +8.7%

Basic Mat: +0.3%, +22.4% (2013 growth was over-estimated)

Tech: +2.9%, +13.1%

Telco: +10.5%, +20.6% (Sprint was dropped from the SP 500 – ignore the change)

Utilities: -1.0%, -7.4%

SP 500: +5.7%, +10.9% (the 5.7% should be 8.3% if JPM’s q3 ’13 litigation charge is excluded);

Financials carried the ball this year, while Industrials came in about where they were expected to. Tech and Healthcare both look disappointing, although it depends on the sub-sector (like biotech) and the stocks.

Conclusion: 2014’s expectation of 9% – 10% earnings growth should actually be a stronger year for growth than 2013’s 7% – 8%, but the critical question remains what multiple do we assign to that growth. All year, the SP 500 has tracked about 2(x) its growth rate using the forward estimate, so if EPS grows 9% – 10% in 2014, and we get a 2(x) PEG on the SP 500, the 2014 SP 500 year-end target estimate could surprise you. The bears, which are rabid already, will have a field day with that, but we’ll do the math on 2014 assumptions shortly. The critical question still remains, how fast will interest rates rise, and will it compress the SP 500’s multiple ? Inquiring minds want to know.

Our 3rd quarter growth rate expectation of 8% became reality as ex the JPM charge, y/y earnings growth for the SP 500 is +8.3%

For q4 ’13, we are expecting a 10% y/y earnings growth rate – the best in 2 years – that hasn’t changed.

Earnings growth is starting to accelerate, which is somewhat unusual given that revenue growth hasn’t changed much from its low-single-digit y/y growth range.

Thanks for reading. We still have more work to do this weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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