Per ThomsonReuters, the “forward 4-quarter” SP 500 earnings estimate fell this past week to $116.94 for a $0.71 decline.
The p.e ratio on the forward estimate rose to 15.75(x), and the PEG ratio is 2.11(x).
The earnings yield on the SP 500 using the forward estimate is now 6.35%.
The year-over-year (y/y) growth rate of the forward estimate fell to 7.45%, down from last week’s 8.02%, on the sharp decline in the forward SP 500 earnings estimate.
Next week, we will get the “bump” in the forward estimate as the New Year begins and the old quarter falls off, and the new forward quarter gets added to forward estimate. The last three months the “forward 4-quarter estimate” we’ve detailed each week, has consisted of the q4 ’13 estimate, through the q3 ’14 estimate, so the new estimate next week, which I expect to be in the $120 area, will be the q1 ’14 through q4 ’14 forward estimate.
With 499 of the 500 SP 500 companies reporting their q3 ’13 results, SP 500 earnings grew 8.7% y/y, the best rate of earnings growth for the key benchmark in 2 years.
What is fascinating is, the q4 ’13 earnings warnings seem pretty dire, as CNBC has detailed, but the expected q4 ’13 earnings growth rate for the SP 500 as a whole, is now projected to be 7.6% as of this week’s “This Week in Earnings” published weekly by Thomson Reuters, which is the HIGHEST rate of expected earnings growth to start a quarter since q1 ’12. The fact is q4 ’13 will be quite robust when companies begin reporting in 2 weeks.
Our estimate for q3 ’13 earnings growth of 7% – 8% was right on, and we now expect the 4th quarter of 2013 to be plus 10% by the time the 4th quarter is fully reported by mid-March ’14.
F0r 2014, which we will update next week, the two best sectors since July 1, ’13 and October 1, ’13 – the only two sectors to see upward revisions to their expected growth rate of earnings for full-year 2014 – is Energy, and Financials. Energy is rather puzzling. The fact is I am not a great energy investor, and only follow 5 of the energy companies fundamentally. We’ve been underweight Energy for clients for quite some time, which has been a good bet this year, but the way the earnings growth estimates are trending for the Energy sector, the Energy underweight may have to be lifted to an “equal-weight” (roughly 11% of the SP 500) or an “overweight”.
Perspective: we will be publishing more sector and relative value articles on this blog over the next week, including updating our 2014 “scenario” analysis, which looked at various earnings growth rates for the SP 500 as well as potential market multiples assigned to those growth rates for 2014.
The fact is we are guiding clients to expect lower returns in 2014, if only from the perspective that the SP 500 is way overbought, and hasn’t had a decent correction since mid 2012. In order to sustain a healthier long-term advance, the SP 500 needs a good, healthy, correction of 10% and we need to see some fear back in the market, if only for a short-time.
In 1994, the SP 500 earnings growth was 19%, but the SP 500 only advanced 1% on the year, as Alan Greenspan raised rates 6 times between February, 1994, and January, February, 1995. My own opinion is that we are entering a period of faster economic growth, a nervous Fed, and what should be a steepening yield curve. Earnings growth is not always a good indicator of what happens to the SP 500 on a coincidental basis. In fact I see SP 500 earnings as more of a lagging indicator, but the forward estimates and growth rate estimates give important clues to help position portfolios.
Here is our conclusions we’re prepping clients with both currently and for 2014:
- Q4 ’13 earnings growth we suspect will be north of 10% led by Financials and it will be the best quarter of y/y earnings growth in the last 8 quarters or two years;
- While we expect SP 500 earnings growth to be stronger in 2014 than ’13’s 8%, we also are guiding to expect lower market returns on the SP 500 in ’14 (probably not a huge stretch given the SP 500’s 30% return for 2013);
- We expect SP 500 earnings to grow at least 10% in 2014, faster than 2013’s 8% annual growth, but not much, and the over/under is more over than under. The bias will be to the upside (better growth) on 2014 earnings;
- The two best sectors for 2014 as of expected earnings growth today are Energy and Financials, the only two sectors to see upward growth estimate revisions for 2014, the last 6 months of 2013;
- The first “hard” guidance for the SP 500 components will come with q4 ’13 earnings reports in January, February ’14, and from that we’ll have a better feel for 2014 earnings growth;
More to come this weekend. Thanks for reading.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA