Per Thomson Reuter’s, ‘This Week in Earnings” the forward 4-quarter SP 500 estimate rose to $127.07 last week, from the prior week’s $126.75.
The p.e ratio on the forward estimate is now 15.5(x) and the PEG ratio (P.E-to-Growth ratio) of the SP 500 has fallen to 1.76(x) the lowest since July 6th, 2012’s PEG of 1.48(x).
On July 6th, 2012, the forward 4-quarter estimate for the SP 500 was $110.94, and the p.e ratio was 12.2(x). (I’d love to tell readers that the PEG has some predictive value regarding forward returns for the SP 500, but through late 2012 and all of 2013 the PEG was within the high 2’s, low 3’s range.) What the PEG ratio might speak to is the unending cacophony by CNBC guests about the “record p.e” ratio on the SP 500 and SP 500 valuation. The fact is, in my opinion, using SP 500 earnings data, the SP 500 trading at 15.5(x) forward earnings earnings, with expected growth of 7% – 9% this year, just doesn’t seem that expensive.
The earnings yield on the SP 500 for our Fed model fans, as of July 18th, 2014, is 6.42%. The earnings yield on the SP 500 has steadily fallen as the appreciation in the SP 500 has been faster than the annual earnings growth.
Most importantly, the year-over-year (y/y) forward 4-quarter growth rate on the SP 500 jumped to 8.85%, the highest y/y growth rate since Jan 13, 2012’s 9.40%.
As we wrote on this blog last week here, the y/y growth rate of the SP 500’s forward estimate is something that needs to be monitored.
Analysis / commentary: Bespoke had some good graphs and commentary on the low volatility we are seeing across many markets, not just the SP 500, but at some point we should have a healthy 5% – 7% correction in the SP 500, as we have had since the summer meltdown of 2011. Healthy markets correct, and the SP 500 still needs a good flush. If memory serves, it has been over 360 – 370 trading days since the SP 500 has touched its 200-day moving average.
Financial earnings this week, including JP Morgan (JPM), Goldman (GS), Bank of America (BAC) and even GE (yes you can think of GE as a financial) had decent earnings reports, in my opinion. Year-over-year earnings growth for Financials has fallen from -3% last week to -8% as of Friday, July 18th, but we now think this will be the bottom for the sector. According to Thomson Reuters, the Citigroup (C) charge cost the SP 500 1.7% in expected q2 ’14 total SP 500 earnings growth.
Per Facstset, and despite JPM’s warning in mid-quarter about the fixed-income market trading slowdown, Capital Markets within Financials are reporting the highest y/y growth at 22%.
The SP 500 is now expecting 5% q2 ’14 y/y earnings growth, but if we ex Citigroup (C) from the SP 500, expected earnings growth increases to 6.7%. (Thomson Reuters did not provide C’s impact on just the Financial sector’s expected growth. Assume it is quite material.)
Factset notes that with 82 of the SP 500 companies having reported, the “revenue beat rate” of 70% quarter-to-date is at a record high. That would be a significant change to the quarterly patterns if its holds up through the end of July and mid-August, 2014.
Per Factset’s John Butters, Energy, Financials and Healthcare are the sectors with the greatest upside surprises. (Energy’s revenue upside surprise is unexpected I would imagine. Bodes well for sector, but was it a function of Iraq-driven bump in crude oil prices in q2 ’14 ?)
Although less than 20% of the SP 500 has reported, the big takeaway this week was that the Financials are in good shape, expectations may have gotten too low, and the Capital Markets may not be dead, even with low volatility. We sold Goldman (GS) last January ’14 in all accounts and will remain out of the name until the stock trades into the mid $140’s. If you want to play capital market activity, JPM, and BAC and even MS will work, and could be nice trades through year-end 2014. (Long JPM, BAC).
Energy’s numbers are looking better too. We’ve never been good investors in the group, and while Exxon and Chevron are thought to be the low-beta names, and thus thought to be safer, we will avoid for now. I think the oil services like Schlumberger, Halliburton and Baker Hughes are too extended technically (long only HAL in the Energy sector, and BTU, which could be Energy or Basic Mat).
Conclusion: q2 ’14 earnings are off to a decent start. 2014 full-year SP 500 earnings growth is still expected at 8.7% per Thomson Reuters. The revenue upside noted by Factset is a pleasant surprise. Let’s see if it holds up through the bulk of earnings this week. It is a positive that the dollar estimate rose week-over-week in the first heavy week of earnings reporting by SP 500 companies. The improvement in the y/y forward growth rate for the SP 500 continues. Remember though, in 1994, the SP 500 grew earnings 19% and the SP 500 rose 1% in that calendar year, as the Greenspan lifted interest rates 6(x) in that remarkable year. SP 500 earnings are a fundamental positive for this market, but the SP 500 is also overdue for a decent correction.
The corporate high yield market has started to correct. The HYG (high yield ETF) is officially oversold. Typically, credit market corrections precede equity market corrections.
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Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA