Per Thomson Reuter’s This Week in Earnings, the “forward 4-quarter” earnings estimate for the SP 500 fell $0.16 last week to $118.65 from $118.81.
The p.e ratio on the forward estimate now 15.6(x), which is slightly higher than what Factset says is the 10-year average p.e of 13.8(x).
The PEG ratio as of Friday, 3/28 is now 2.57(x), in line with where it has been over the last year. In the 2nd quarter of 2013, the PEG’s 2013 max value was 3.71(x) and in December ’13 the low print on our spreadsheet was 1.88(x) for the year.
The year-over-year growth rate of the forward estimate is now 6.09%, down from last week’s 6.12% and the prior week’s 6.19%. As readers now, I would like to see that growing rather than contracting.
Our q4 ’13 SP 500 earnings growth estimate of 10% was a pretty decent prognostication: the quarter looks like it will finish up at +9.9% y/y earnings growth, i.e. close enough for government work. While 5% SP 500 growth would very good for q1 ’14, I expect the quarter will be between 3% – 5%.
Difference between “top-down” and “bottoms-up” estimates:
In our recent post on SP 500 operating EPS from March 17th, 2014 we explained to readers what the difference was between “top-down” and “bottoms-up” EPS estimates for the SP 500. Ive struggled with this for years, since I constantly have to remind myself that what we see and hear in the daily financial media is the “top-down” estimate, which from what I can tell through the years is the lower of the two numbers, while once the quarter is reported and the numbers are “clean” the bottoms-up estimate is locked and is the final number.
The point we are trying to make, is let’s look at the top-down and bottoms-up estimate for 2013 and 2014 are currently, just to give readers a feel for the real numbers:
2013 top-down SP 500 EPS estimate: $108.85
2013 bottoms-up SP 500 EPS estimate: $109.69
2014 top-down SP 500 estimate: $117.37
2014 bottoms-up SP 500 estimate: $119.03
* Source: Thomson Reuters as of 3/28/14
Here is critical point that I think needs to be made about SP 500 earnings for 2014: when we get the quarterly bump on Tuesday, April 1, my guess is that the final 2013 SP EPS “actual” number will be $110 or just above. Versus the actual 2012 EPS of $103.80, the actual EPS percentage growth for 2013 will be 6%, versus the 4.9% which is the 2013 “actual” versus the 2013 top-down estimate of $108.85.
My final point regarding this subject, is that I fully expect 2014 “final” EPS to be $120 or greater, but we wont get the final number until this time next year. If we do $120 in EPS for the SP 500 in calendar 2014, that is +9.1% earnings growth for the year and will be the best rate of growth since 2011’s 15%.
Again the point to be made is that mixing bottoms-up and top-down gets a distorted view of earnings growth. We have to compare apples-to-apples.
To conclude, SP 500 earnings and expected growth is NOT the problem with the market today. While q1 ’14 earnings growth of 2% per Thomson Reuters, and -0.4% per Factset, we will likely wind up in the +3% to +5% range by the time we get to June 30th or so, even with the weather issues in q1 ’14. While the big issue was weather in q1 ’14, and we could see some pent-up retail demand in q1 ’14 that was simply transferred from the first quarter, quarterly earnings growth will likely gain strength through 2014.
q1 ’14: +2.1% (est);
q2 ’14: +8.3% (est, and we will see normal erosion over next few months);
q3 ’14: +11% (est, JP Morgan took huge charge in q3 ’13, thus Financials will lap easier comp’s);
q4 ’14: +11.2% (4th quarters have been strongest of the year for earnings growth since ’08);
Bottom line, expect 9% – 10% SP 500 earnings growth for 2014. However the SP 500 rose 32% in 2013, on what will likely be 8% earnings growth. Market cap, sectors selection, “style” selection (value vs growth) all matter too in generating excess return for client accounts.
Ranked from best to worst “expected” sector earnings growth for 2014:
- Telco +15.9% ( Could be distorted by Verizon. Per Factset, if VZ excluded from Telco sector for q1 ’14, earnings growth falls from +23.8% to -2%.)
- Cons Disc +10.1% (still a leadership sector)
- Financials +9.4% ( I expect much lower growth for Financial earnings in 2014. q1 1’4 earnings will be significant in terms of loan-loss releases)
- Basic Mat +9.2% (our sleeper/under dog sector for 2014)
- SP 500 +8.6%
- Hlth Care: +8.4% (took a beating in q1 ’14 thanks to biotech correction)
- Technology +8.4% (we are split between growth and value tech)
- Energy +8.0% (Barrron’s article this weekend thinks we are headed to $75 oil)
- Industrials +7.8%
- Consumer Staples +6.5%
- Utilities +5.3%
Source: Thomson Reuters data as of 3/28/14
The sectors which have seen upward revisions to their 2014 earnings growth estimates since Jan 1 ’14 are Telco, Health Care, Utilities.
Thanks for reading. Still more left to do, over the weekend.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA