A Longer-Term Look at SP 500 Earnings: Perhaps Foolishly, Why I Remain Bullish

Here is one of my favorite spreadsheets, FCSP500longtermdata, that takes a VERY long-term look at SP 500 earnings, annual returns as well as returns on the 30-year Treasury and the closing yield each year.

The reason the spreadsheet was built a few years ago and updated annually was to try and gauge or compare SP 500 earnings growth to annual SP 500 returns.

A couple of fun facts: 

1.) During the decade from 1990 to 1999, the SP 500 averaged 19% per year for the decade, while the SP 500 grew earnings, just 8% per year.

Needless to say, you could safely call the 1990’s a decade of “P.E expansion”.

2.) During the decade from 2000 to 2009, the SP 500 averaged a 1.2% per year for the decade, while SP 500 earnings averaged 3% pear year.

It would be safe to say, we could call the 2000’s a decade of “P.E contraction”.

3.) What surprised me was that if we look at 2000 – 2015 (YTD), and with 2015 incomplete, what struck me was that the ‘”average annual” return was 5.5% for the SP 500, while the SP 500 has averaged 6% annual EPS growth during that time.

That statistic surprised me.

4.) Since 2010, and YTD through 2015, the SP 500 has averaged earnings growth of 12%, and since 2010, through 9/30/15, the SP 500 has averaged a 12.5% per year total return for that time period,

The point being that the SP 500 returns are really moving in lockstep with SP 500 earnings growth, and we are still seeing a smidge of “P.E contraction”.

Nothing more, nothing less.

Analysis / conclusion: If the last last 30 years are any example, it sure seems as of the decade of 2000 – 2009 was a giant “colon blow” of the excesses and P.E expansion of the 1980’s and 1990’s. Today with the Financial system being de-risked, longer-term the SP 500 returns are moving in lockstep with SP 500 earnings growth.

Even in 2015, the overall SP 500 earnings growth this year will likely be flat to slightly positive, depending on what Q4 ’15 looks like, and the SP 500 will probably finish calendar 2015 flat to +/- 1% – 2%.

My favorite statistician, Ryan Detrick notes that the correlation between SP 500 earnings and returns is 92%. That is a positive statistical correlation, but earnings are not a leading indicator.

I remain optimistic about future SP 500 returns given the lower average rate of SP 500 earnings growth, and the fact that there has been little P.E expansion by the SP 500 over the last 15 years.

Perhaps my headline and conclusion could be re-worded to note that, while being “bullish” might scare readers, the likelihood of a repeat of the 2000 – 2009 decade of returns seems extremely remote.

2016 will likely be a better year too. I’m going to go out on a limb and say 2016 will probably see +10% or better on the SP 500 in terms of annual return. SP 500 earnings will improve next year too.




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