SP 500 Weekly Earnings Update: SP 500’s Tech and Financial Concentration

Here is our update on the SP 500’s “market cap vs earnings weight” of the 10 SP 500 sectors: FC – marketcapvsearningswt

The story the data is telling hasn’t changed in a while and remains the primary reason I remain sanguine about the prospects for forward returns: the two largest sector concentrations in the SP 500, i.e. Financial’s and Technology, had their respective bear market’s from 2000 through 2008, and hence, for at least 40% of the SP 500, I do think that forward returns for two sectors, if not “1990’s like” at least aren’t nearly as probable to be as dire as we saw the last decade.

It is interesting to me that not one CNBC, Fox or Bloomie commentator has ever raised Tech and Financial concentration issue with Jack Bogle: with the Technology and Financial concentration, could the SP 500 index be fundamentally flawed from a benchmark perspective ?

It is for this reason, I am slowly selling the QQQ and replacing it with Direxion’s QQQE or equal-weighted QQQ. The QQQE reduces the Apple weight of 15% found in the QQQ’s to an equal-weighted 1%, which given Apple’s out-performance (and continued wild optimism by investors) the last 15 years, makes more sense to me (and hopefully to clients).

It is because the Tech and Financial’s concentration and last decade’s bear markets, that I continue to be optimistic on the SP 500 in 16, expecting +10% next year, and it is because of Apple’s weight in the QQQ that a slow shift is occurring from holding the QQQ to the QQQE.

If readers are wondering if Technology and the SP 500 can do well if Apple stagnates, given its 4% market cap and 6% earnings weight within the SP 500, look no further than 2013, when the SP 500 returned +32% and Apple was up single digits on the calendar year.

Sentiment around SP 500 returns continues to be pretty dire for 2016: Brian Belski went negative last week. Goldman Sachs now expects flat returns in 2016. Not one person that I know can be called “table-pounding bullish” about SP 500 returns in 2016. (No one want to look the fool, which I occasionally excel at, so I’ll take the opposite side of the trade.)

Remember too, in 2013, Chairman Ben was looking at tightening Fed policy and raising rates: could the SP 500 rally smartly in the face of fed funds edging higher ?

I continue to think 2016 will be a good year for SP 500 returns, but it’s a lonely stance right now, and always subject to change.

SP 500 earnings data – By the Numbers: 

  • Forward 4-quarter estimate of $123.58 versus last week’s $123.77.
  • The P.E ratio on the forward estimate as of Friday, November 27 was 17(x).
  • The PEG ratio remains negative, and elevated if we assume core SP 500 earnings growth of 5% – 7%
  • The SP 500 earnings yield is 5.91%, still quite high.
  • The y/y growth of the forward estimate was -1.89% versus -2.07% last week. We (me and readers) need to see that turn positive.)

Analysis / Conclusion: I’m watching 2016 full-year Energy earnings to see if the sector stays positive, however it is really Financials and Technology that will drive the index in 2016. Industrial’s and Consumer Discretionary could help, but Consumer Discretionary is being driven almost entirely by Amazon (AMZN). Ex-Amazon, Consumer Discretionary is up in-line with the SP 500 in 2015. (Long AMZN for clients)

The year-over-year growth in that forward estimate needs to turn positive. That continue sto make me nervous and the SP 500 is lapping easier Energy and US dollar comp’s from now through June 30 ’16.



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