Per ThomsonReuters, the “forward 4-quarter” estimate for the SP 500 ended the week at $120.32, down $0.28 from last week’s $120.60.
The p.e ratio on the forward estimate is now 15.2(x). The PEG ratio is now 2.35(x), still at the high end for the past 12 – 13 months.
The SP 500 earnings yield rose this past week to 6.72% from last week’s 6.56%, understandable given the drop in the SP 500.
The y/y growth rate on the forward estimate is 6.33%, down slightly from last week’s 6.45%.
Our opinion is that the growth rate on the forward estimate needs to break above 8% for the SP 500 to make a major leg higher. The p.e on the market will likely expand as the growth rate moves higher. If the forward estimate growth rate increases to 10%, and the multiple on the forward estimate moves from 15(x) to 18(x), we get a high teens to low 20% increase in the SP 500 again. (However the market action the first three weeks of the year is certainly not leading us to believe that will happen in 2014.)
Q4 ’13 earnings aren’t that bad, given the market action: with 122 companies reporting or 20% of the SP 500 having reported q4 ’13 results by Friday, January 24, 2014, the expected growth rate for q4 ’13 earnings jumped back to 7.5% last week 7%, and the start of the quarter’s 7.6%. Our forecast for 10% q4 ’13 earnings growth is looking in doubt already, although the growth rate has tended to track higher as we moved through the quarter’s actual reporting period.
Q4 ’13 Changes in Sector Growth Rates:
Since Jan 1, ’14, here is how earnings have changed for q4 ’13 estimates by sector:
(The first column is the SP 500 sector, the 2nd column is the estimated earnings growth rate as of 1/24/14, the third column is estimated earnings growth as of Jan 1 ’14)
Cons Discretionary: +6.5%, +9.1%
Cons Staples: +4.3%, +4.3%
Energy: -11%, -7.5%
Financials: +23.1%, +22.4%
Hlth Care: +7.4%, +5.9%
Industrials: +11.4%, +11.5%
Materials: +7.4%, +6.8%
Technology: +7.6%, +5.7%
Telco: +21%, +22.6%
Ute’s: -4.2%, -4.1%
SP 500: +7.5% +7.6%
Commentary / Conclusion: the earnings results for Health Care, Industrials, Materials, and Technology are all positive in our opinion, although the “Granddaddy of ‘Em All” in terms of the tech sector, reports Monday night, Jan 27th, ’14, after the bell with Apple’s q1 ’14, December quarter, results. Per John Butters of Facstet, if AAPL is excluded from technology, the expected growth rate for Technology (per Factset, and not ThomsonReuters) rises to 8.8% from 5.9%. Thomson’s and Factset’s estimated earnings growth for Technology for q4 ’13 is pretty similar. That is a good sign. Let’s see what happens to AAPL’s forward estimates on Tuesday. They will have a big influence on the change in Technology earnings for full-year 2014 with next week’s report.
The full-year 2014 expected growth rate for SP 500 earnings is currently 10.4% versus 10.8% as of January 1, ’14. That is a good sign. We aren’t seeing a particularly noteworthy slashing of estimates for the full-year (yet). We’ll have a better feel for full-year 2014 after next week, which is the heaviest week of SP 500 companies reporting. Most companies will give full-year 2014 guidance with q4 ’13 earnings and analysts will adjust their models and update their full-year 2014 revenue and earnings estimates following management’s guidance.
This week we sold Goldman Sachs (GS) and Sandisk from our longer-term equity positions, and still have the proceeds in cash. Retail stocks have taken an absolute pounding and offer their best values we think in a few years. Some of the GS and SNDK proceeds will find their way into this sector. Back with more on retail later today, this weekend, early next week. Retailers typically start reporting after Feburay 10th or so, and through the month of February and March ’14. With the China weakness this week, the sector took a pounding, but we still like Basic Material’s stocks like Alcoa (AA), US Steel (X), which reports this week, and Freeport (FCX) which reported last week. However to be frank, some of that sector’s overweighting was predicated on China continuing to grow at 7% or faster.
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I do think this is a normal and badly-needed correction within the SP 500.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA