Per ThomsonReuter’s This Week in Earnings, the “forward 4-quarter” earnings estimate for the SP 500 fell $0.14 this past week to $120.60, from $120.74.
The forward p.e ratio is now 15.25(x) the forward estimate.
The PEG on the SP 500 using the forward estimate is now 2.36(x), with the average PEG since July 1, ’13 being 2.18(x). The PEG has gravitated around the 2(x) – 2.25(x) for some time.
The year-over-year growth rate of the forward estimate was 6.45% last week, vs 6.56% last week. The “average” y/y growth rate since July 1 ’13 has been 6.89%.
The SP 500 has gyrated around the 12/31/13 closing level of 1,848.36. Friday’s close on the SP 500 is/was 1,838.70.
There has been a lot of chatter about the “2-year Presidential Cycle” which could portend a flat SP 500 until the fall of ’14. There is always a theory circulating about why the market is doing this and that, and there is always a historical pattern that can be applied to current markets (the causality of the pattern is what usually remains in question), but my own conclusion is that, until the forward growth rate breaks above the high 7%, low 8% growth rate, the SP 500 could be range-bound for a bit.
Another leg higher for the forward growth rate, should be the logical foundation for another round of p.e expansion for the SP 500.
That is just one opinion. The 2-year Presidential Cycle and it’s historical pattern works too.
Does the Earnings Data Tell Me Anything Actionable ?
Reading, recording and tracking the SP 500 earnings data each week, can be somewhat tedious. The important element to all this analysis is that the data has to be telling me something useful in terms of potential trends, and it must be worth acting upon to be useful to myself and readers. Sometimes the weekly earnings recaps are just old news, and I have to resist reaching conclusions that just aren’t there.
Here is how q4 ’13 earnings growth estimates have changed for each sector of the SP 500 since Oct 1, ’13:
Consumer Disc: +7.4%, +14.2% (decline of 680 bp’s in sector growth expectations)
Consumer Staples: +4.2%, +6.9% (decline of 270 bp’s)
Energy: -10.4%, -1.5% (decline of 890 bp’s)
Financials: +23.0%, +25.2% ( decline of 220 bp’s)
HealthCare: +6%, +8.20% (decline of 220 bp’s)
Industrials: +11.5%, +17.3% (decline of 580 bp’s)
Materials: +6.7%, +12.9% (decline of 620 bp’s)
Technology: +5.3%, +7.7% (decline of 240 bp’s)
Telco: +22.7%, +19.6% (improvement of 310 bp’s)
Utilities: -4.1%, -4.1% (no change in expected growth)
SP 500: +7%, +11% (decline of 400 bp’s)
Nothing is really abnormal about this except for this week, when we saw the overall expected growth estimate for the SP 500 fall from 7.3% last week to 7% this week. Usually as the quarter’s earnings start to get reported, the year-over-year growth rate starts to improve.
Telecom is the only sector to show an improvement in expected growth since 10/1/13.
Energy’s y/y earnings decline of 10% is the worst of all 10 sectors, but 2014 might prove to be better than what we are seeing in q4 ’13.
How does full year 2014 SP 500 earnings growth look today ?
Here is the change in full-year 2014 sector growth estimates from 10/1/13 to 1/17/14:
Consumer Discretionary: +13.2%, +18.7 (decline of 550 bp’s)
Consumer Staples: +9.9%, +10.8% (decline of 90 bp’s)
Energy: +12.3%, +10.7% (improvement of 160 bp’s)
Financials: +11%, +9.3% (improvement of 170 bp’s)
HlthCare: +8.3%, +9.6% (decline of 130 bp’s)
Industrials: +9.3%, +11% (decline of 170 bp’s)
Materials: +16.4%, +18% (decline of 160 bp’s)
Technology +10.7%, +11.6% (decline of 90 bp’s)
Telco: +13.5%, +10.9% (improvement of 260 bp’s)
Ute’s +4.8%, +4.4% (improvement of 40 bp’s)
SP 500 +10.8%, +11.4% (decline of 60 bp’s)
Despite Energy’s q4 ’13 10% decline y/y for q4 ’13, something is keeping the expected 2014 earnings growth rate, not just elevated, but improved by 1.6% over the next 12 months. The reason Energy stocks out here is that it gets no traction currently in the mainstream financial media, and thanks to the price of gasoline, seems to have fallen out of favor. You cant ignore that positive revision, when viewing the pattern across the rest of the SP 500. In addition, Energy’s expected growth rate for 2014 is still higher than the SP 500 as a whole. My question is, which sectors are driving it and how do we take advantage of it ? Our only Energy long currently is Halliburton (HAL). Schlumberger (SLB) rose 1.8% on Friday. 1/17/14 on 2(x) average volume after their q4 ’13 earnings report but forward estimates have been stable for the oil services giant.
Financial’s look solid for 2014. I don’t think you’ll see the same level of earnings growth (close to 25% for 2013, after excluding JP Morgan litigation charge in q3 ’13) in ’14 at 11%, that we saw in ’13. The overall growth rate looks to be cut in half given the data. That means other sectors will pick up the slack in 2014. (Long JPM)
Consumer Discretionary could be a problem child. The charts look to be rolling over (technical analysis) and look at the q4 ’13 and the full year 2014 estimate reductions for the sector. Using the XLY (SPRD Consumer Discretionary ETF) as a proxy, Amazon and Comcast are the top weightings at 7%, with media companies comprising 4 of the top 10 holdings. The Top 10 holding’s have a weighting of 43% in the XLY, with media comprising 19% of the Top 10 positions. Consumer Discretionary has been a powerhouse for the last few years in terms of SP 500 leadership: the XLY was up 41% in 2013, excluding the dividend, and was one of the SP 500 leadership groups, along with healthcare. Per Bespoke, 51% of Consumer Discretionary stocks are trading above their 50-day moving averages. The sector could simply be working off an overbought condition too. Consumer Discretionary has the highest sector p.e within the SP 500 at 21(x) earnings. (Long small position in AMZN, and long F, SBUX, etc. all Consumer Discretionary components.) Consumer Discretionary comprises 12% of the SP 500 by market cap, ranking about 5th of the 10 sectors by market cap weighting.
Conclusion / Summary: Change of leadership within the SP 500 usually occurs within various stages of the business cycle. The downward earnings revisions particularly for full-year ’14 for Consumer Discretionary have my attention. Consumer Discretionary and Basic Materials were expected to be the top-ranked sectors for 2014 earnings growth, but note the reduction in Basic Materials expected ’14 earnings growth versus Consumer Discretionary. Basic Material’s relative earnings strength, at least in terms of the degree of reduction in estimates, is quite obvious, and a positive for the sector. Best Buy’s (BBY) pre-announcement was painful for Consumer Discretionary as was Target (TGT). (Not long either).
The SP 500 remains overbought, and hasn’t had a decent correction since 2011.