Per Thomson Reuters’, “This Week in Earnings”, the forward 4-quarter estimate for the SP 500 fell one thin dime last week to $119.23 from $119.33.
The p.e ratio on the forward estimate is now 15.4(x). The PEG ratio is 2.5(x).
The SP 500 earnings yield is 6.49%, which is about where it was in late December ’13.
The forward 4-quarter growth rate of the forward estimate is now 6.15% versus last week’s 6.19% and down from late December’s 8% rate.
Here are the three themes we are hearing around earnings currently, mostly in the mainstream financial media:
1.) Q4 ’13 earnings are “strong”, which is true. Readers knew about the strength a while back i.e. in the middle of q4 ’13 when we wrote about less erosion than normal around the expected q4 ’13 year-over-year earnings growth rate;
2.) If we exclude certain sectors or subs-sectors, “true” or normalized earnings are weak. This is also true, but very misleading. Exclude Technology from the late 1990’s growth rate, which typically grew 25% – 35% every quarter, and the true growth rate of the SP 500 looked much weaker. When Apple (AAPL) was reporting 50% revenue and 80% EPS growth from 2009 – 2012, some were excluding its results from the SP 500 and noting the “true” growth rate. This is very deceptive analysis, and in fact is why active investment management exists. The probability remains that for stocks and sectors growing faster than the SP 500 as a whole, the odds are that relative performance of those stocks and sectors should exceed that of the SP 500;
3.) Q1 ’14 SP 500 earnings is starting to attract more attention and in fact the first quarter’s expected growth rate of +3% is the weakest quarter of expected year-over-year earnings growth growth since mid-2012. However, don’t be fooled: here is a link from this blog almost exactly one year ago in February, 2013. Note the slashing of q1 ’13 SP 500 expected earnings growth rate. At that time, the Presidential election was now complete, and there were other things happening around Washington that didn’t inspire consumer confidence. As the above link indicates, we’ve been here before: q1 ’14 expected weak earnings growth might be seasonal given that corporate management’s are now guiding for full-year 2014 with q4 ’13’s results and could be more cautious around q1 ’14 just to UPOD (under-promise and over-deliver).
- q4 ’13 earnings are indeed strong and that is a positive;
- q1 ’14 earnings are indeed weak, but this was the case last year as well, and like last year I suspect it is a case of management conservatism;
- Full-year 2014 SP 500 earnings growth continues to gravitate around +9% growth. That is down from +10.8%’s Jan 1 ’14 expectation. Looking at February 22nd, 2013’s expectation for full-year 2013 expected growth, last year at this time, Thomson Reuters was expecting roughly 9% year-over-year earnings growth in 2013, and we will finish the year around 6%, which includes the JP Morgan write-off in q3 ’13. Operating earnings growth for 2013 is probably closer to 7%, but we’ll know where when the final 2013 numbers are printed in March, ’14.
Our q4 ’13 expected earnings growth of +10% for the SP 500 likely will not happen, with 441 of the SP 500 now having reported q4 ’13 earnings. However we were close at +9.6% actual year-over-year growth. There are still 5 weeks left in the quarter, to see if there can be another 40 basis points of growth eke’ed out of the remaining 59 companies to report.
To conclude, with the February retail reports starting the last few weeks, we’ve been seeing Jan ’14 quarter end results. No question the weather is an oft-cited role in some of the weakness, which may or may not be the case. If you live in the Midwest, in Chicago as I do, you’ve been hunkered down like an Eskimo since early December. The winter snow and cold started much earlier than normal this year.
We still think 2014 operating EPS growth for the SP 500 will 10% in calendar 2014. However, the year could be back-end loaded, with q3 ’14 being much stronger than q3 ’13. At 2.5(x) PEG, the SP 500 seems pretty fairly valued. Sector selection and active management will be a critical part of our 2014 performance.
My own opinion is that SP 500 earnings growth slowly improves over time, however there is such little incentive for SP 500 leaders to take risk here. Hopefully that changes come early November ’14.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA