SP 500 Earnings: Market Cap vs Earnings Weight and How the First Shall Be Last…

SP 500 Earnings data “by the numbers”: (source Thomson Reuters “This Week in Earnings”):

  • Forward 4-quarter estimate: $120.95 versus $121.23
  • P.E ratio: 16.5(x)
  • PEG ratio: 14.5(x) and continues in nosebleed territory given 1% – 2% y/y EPS growth rate
  • SP 500 earnings yield: 6.05%, down from its highs of 6.5% – 6.7% in late Jan, mid February, 2016.
  • Year-over-year growth rate of the forward estimate: +1.13% versus last week’s 1.33%.

The Biblical reference above can be used to describe the SP 500 rotation this year as the laggards of 2015 and the last few years have become the leaders of 2016, most notably Energy, commodities, Retailers, Basic Materials, (which is really chemicals and industrial metals), Transports (IYT) and gold, which is up 20% from its lows and could be starting a new bull market.

The original SP 500 low this year on January 20th, 2016, seemed to be a key level and date, which marked a reversal-of-fortune for laggard groups of the last few years.

Market-Cap vs Earnings Weight: FC – marketcapvsearningswt.

Note the downward trend in Energy’s “earnings weight” – both Thomson and Factset expect Energy sector earnings to decline 95% in Q1 ’16. This blog post from two weeks ago noted that Energy revenue estimates look to be stabilizing.

A friend shot me an email yesterday saying he was lightening up his equity exposure into this rally the last few weeks. My response to him was that in Q1 ’09 the SP 500’s “forward 4-quarter” estimate didn’t stop DECLINING until May ’09. The SP 500 bottomed on March 9, 2009 or a full 8 weeks before the estimate started rising.

Prevailing market sentiment remains pretty bearish, which I see as a long-term positive.

Analysis / conclusion: There is a lot of good info on that “market-cap-vs-earnings-weight” spreadsheet which wasn’t elaborated on, in this post. Note some of the sector trends in terms of earnings weights, i.e. which sectors are declining versus expanding as a percentage of the SP 500.

Factset had an interesting and ominous warning on their weekly “Earnings Insight” analysis sent out every Friday afternoon: “…the decline in bottom-up EPS estimate during the first two months of the first quarter (2016) was larger than the 1-year, 5-year and 10-year averages…and was the largest percentage decline in the bottom-up EPS estimate over the first two months of a quarter since Q1 ’09.”

Factset goes on to say (my words) that the decline is all being driven by the Energy sector.

In this market environment, technical action is paramount. Can the SP 500 regain the 200 day moving average ? Can the bounce in the laggard sectors of the last few years be sustained ? Given the under-performance of the commodity and asset classes like emerging markets for long periods of time, I think the groups could be in the longer-term process of bottoming. The SP 500 could continue to work higher just with very different leadership than the last few years, even though the two heaviest weights in the SP 500 – Technology and Financials – could not be considered expensive on a valuation basis.

Bespoke has an interesting research piece noting that the Energy ETF, XLE has had 4 separate 20% rallies since crude oil peaked. The XLE is currently experiencing its 4th rally. The difference is other commodities like gold, are now rallying as well. Even copper looks to have bottomed.

Given the sentiment around the SP 500, I still think the main benchmark can return 10% this year, but the SP 500 and the other indices are also testing the 5-year uptrend lines. The main equity benchmarks remain at critical technical support levels. Here is a great post from Josh Brown (@reformedbroker) on being a “closet technician”. Josh wrote this over 2.5 months ago, and it is worth a read.

The fundamentals look bad, but so is sentiment, and technically the SP 500 is between the “double-top” in 2015 (2,132 – 2,134) and the “double-bottom” of 2016 (1,810 – 1,812).

Keep an open mind: the SP could have an “average” year in 2016, but what leads the market in terms of sectors and asset classes, could be a very different story.

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