10% SP 500 return in 2016 Shouldn’t Be A Surprise

Per Bespoke, bullish sentiment is at a 3-year low (according to Bespoke’s sentiment work published late this week), and with the Fed rate hike, perhaps there is more pain to come to the downside, even though we are entering two of the strongest weeks of the year for the SP 500 from a seasonal perspective.

Last year at this time, client’s were being told to expect a 0% – 5% return for the SP 500 (here) although I thought Financials would do better in 2015 (which they haven’t) since Financials were the worst performing sector of 2015, down 7.5% as of September 30, 2015.

Here was the blog post exactly one year ago from yesterday, detailing the 2015 sector forecast using Thomson Reuters data, and here was the sector outlook for 2015 in late 2014. This sector outlook was simply Thomson’s estimates for 2015 as they stood one year ago. Note the difference in the overall SP 500 growth (8.4% expected one year ago versus the +0.2% expected as of Friday, 12/18/15.( Also note that Energy’s expected sector earnings decline was -20% exactly one year ago, but actual today is -59% – yowser.)

In terms of “expected” SP 500 returns why is a 10% total return (or better) expected for the SP 500 in 2016 ?

Here is what I wrote in June 2013 citing one of Norm Conley’s charts. Norm doesn’t tweet much anymore, but his postings were a classic example of someone who “talked little, and said much”.

In June 2014, this blog cited similar work from BlackRock here.

And if those posts don’t look familiar, here (FCSP500longtermdata) is my own “long-term data” spreadsheet that has been posted frequently, using Ibbotson return data from Morningstar’s “Stocks, Bonds, Bill & Inflation” – note the “average” return for the SP 500 since 2000 is just over 6%, versus the long-term average return of the SP 500 from the early 1970’s through 2014 is just shy of 12%.

Finally, if the data or the charts aren’t credible enough for you, here is a link to Josh Brown’s “The Reformed Broker” blog. As a huge fan of Josh’s work even when I disagree with him, I do think the trio of Barry Ritholtz, Josh and their Director of Research Michael Batnick (@michaelbatnick) do some very thoughtful research. The RWM team come to a similar conclusion with slightly different data, but they have made a stronger case looking at the rolling distribution of returns.

I could be wrong and this doesnt constitute advice, but I do expect higher stock prices (i.e. SP 500) in 2016 and the years ahead.

The secular bull market remains intact.

SP 500 Earnings data – by the numbers: 

  • Forward 4-quarter estimate this week is $122.99 versus last week’s $123.34
  • The P.E ratio is 16.3(x)
  • The PEG ratio remains negative.
  • The SP 500 earnings yield is 6.13% exactly the same as last week.
  • The y/y growth rate of the forward estimate fell -0.11% versus last week’s -0.71%.

Analysis / conclusion: Last week, with the SP 500 earnings yield back above 6%, I thought we’d see a decent rally in the SP 500, but the SP 500 closed the week at 2,005, versus the previous week’s 2,012 close. Once again we saw a LOT of intra-week volatility only to find that if you had slept through the week and simply looked at the change in the SP 500 from Friday, December 11th through Friday, December 18th, you’d have though the week was a yawner. There is a positive change occurring to one of our favorite earnings metrics but I want to give it a few more weeks before putting it out for readers. Let’s see what that forward 4-quarter estimate shows next week, and the week after, the final two weeks of 2015.

The top two sector weights for clients remain Financials and Technology, and I dont expect that to change in 2016, at least as of right now. The biggest change to client portfolio’s in the last 3 – 4 months, is that some Energy exposure (XLE, IYE) has been added to client accounts as well as Emerging Markets (EEM, VWO) and even some Brazil exposure (EWZ) in select accounts. These positions total roughly 5% in client accounts in terms of their weighting. Whether they get increased or reduced depends on how they trade early in 2016 and how earnings estimates shape up, not to mention how the dollar trades.

 

 

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