Per Thomson Reuters, the “forward 4-quarter” estimate of the SP 500 fell last week to $122.97 from the prior week’s $123.04.
The P.E ratio on the forward estimate using Friday’s SP 500 close is 16(x), for expected growth of 7% – 10% this year.
The PEG ratio is now 1.84(x), consistently below the 2.5(x) – 3(x) range from last year.
The “earnings yield” on the SP 500 continues to shrink, and closed Friday, June 27th at 6.27%.
The year-over-year growth rate of the forward estimate rose to 8.69% this past week, versus 8.60% last week.
Analysis / Commentary: Next week, as we roll into the 3rd calendar quarter of 2014, (wow, how time flies) we will get the quarterly bump in the “forward 4-quarter” earnings estimate, which given its history should approximate $125 per share or more, when we get the number from Thomson Reuter’s “This Week in Earnings” next Thursday July 3rd or Friday, July 4th. Using this week’s closing value on the SP 500, and next week’s expected $125 per share, the expected forward p.e ratio will be around 15.7(x), slightly lower than this week’s closing P.E ratio.
The DuPont negative pre-announcement this week, was one of the few major negative surprises that come to mind the last month.
What continues to surprise me is the stability about the forward earnings estimates, and the lack of volatility. Although the absolute number of negative revisions of forward 2014 estimates has outnumbered the positive revisions, my own opinion is that the negative revisions are so small as a percentage of the dollar earnings per share (EPS) estimates, that the difference is minimal.
John Butters of Factset has picked up on the fact that q2 ’14 expected SP 500 earnings growth estimates are being reduced at a much lower rate than previous quarter’s. We also saw this last fall for q4 ’13. The expected q2 ’14 SP 500 earnings growth for q2 ’14 was +7% on May 30th, 2014, and as of Friday, June 27th, has been reduced to just +6.6%.
If you’ve followed the data as long as I have, that Q2 ’14 growth rate reduction would normally be close to 1.5% – 2%, not 40 basis points. Again that is the 30-day reduction, not the 90 days reduction. Per Factset, the average decline in the EPS estimate over the last 4 quarters has been 3.9%, the last 20 quarters has seen EPS decline (on average) by 2.90% and the last 40 quarters, 4.6%. What Factset isn’t telling you is that typically through the quarter, expected growth rate the reduction gets more severe, as the quarter progresses, and then typically bottoms the first two weeks of the new quarter, and begins to rise when actual quarterly earnings are reported.
Jeff Miller, a great blogger and long-time friend who writes the “A Dash of Insight” blog and I have talked about this phenomenon many times: using sector and SP 500 earnings estimates, the typical pattern for the consensus analyst estimates and growth rates is that the analyst’s start out optimistic 12 – 18 months out, then once inside 12 months start to gradually reduce their earnings estimates which typically reach a nadir just prior to the actual quarterly results being reported, and then the growth rate rises on actual earnings reports.
At least that has been the trend, post the 2008 Great Recession and Financial Crisis.
I will conclude our last post on q2 ’14 SP 500 earnings with this comment: analyzing SP 500 earnings is not a sound-bite that you can give for a CNBC interview. Analyzing the data over longer-time frames is a combination of different time horizons, (for instance, q2 ’14 expected earnings, versus q1 ’14) and then watching how forward revisions are being changed (e.g. watching the reduction the reduction in q1 ’14 growth rate estimates and then the lack of reductions in q2 ’14 growth rate estimates, all the time keeping an eye on the full-year 2014 expected growth rate estimate), and the “relative” versus “absolute” game. For instance, in q2 ’14, the Basic Materials sector has seen the sharpest downward revisions to expected growth for q2 ’14 earnings, (greater than any other SP 500 sector(, and yet if we ranked the 10 SP 500 sectors by expected q2 ’14 y/y earnings growth rates, the Basic Materials sector would rank in the top 3 expected quarterly growth rates. That just tells me that analyst consensus started out too optimistically, and now the growth estimates are probably “reasonable”.
This isn’t a criticism of CNBC, but the punditry comments around SP 500 earnings are usually picked to fit the forecast, rather than, as Jeff Miller has long opined, the data is scrutinized and analyzed, and the forecast is a function of the data. I can’t tell you how many times there has been a Strategist or Portfolio manager on CNBC who has used the “negative revision’ data of SP 500 earnings to support a bearish outlook, without telling viewers at the same time, that SP 500 consensus operating earnings have been growing steadily higher since 2009.
SP 500 earnings – using the forward growth rate – look to be getting stronger as we progress through 2014. I still think we could see 10% y/y growth in SP 500 operating earnings growth in 2014.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA