Is there a forward earnings curve for the SP 500 ?
Id say “yes” although readers need to be careful in the kind of earnings data they review when making investment decisions.
There is “bottom-up” data which constitutes the quarterly estimates seen for the SP 500, and there is the “top-down” estimates, which per Thomson Reuters’ crack Earnings Insight team (Gregg Harrison and David Aurelio) combine both the strategist estimates for a full-calendar year and the bottom-up estimates, which are often the sum of the 4 calendar quarters.
Using the calendar-year estimates as provided by Thomson Reuters, here is a spreadsheet constructed late last week, showing the trend in annual estimates for the SP 500 and the changes therein:
It will take more time for me to construct a larger history and to incorporate the quarterly bottom up estimates to see if there is a predictive aspect to bottom-up forward earnings, but what caught my attention in the above data, is how the 2017 consensus EPS estimate has stopped declining earlier than when it normally does.
After falling 4% from January 1 to April 1 ’16, that forward 2017 EPS estimate fell just 1% in the 2nd quarter ’16.
So much of 2015 and 2016’s SP 500 500 estimate revisions were impacted by Energy and Basic Materials, so the rebound in crude oil and commodity prices this year could be positively influencing 2017 as well.
Put another way, as of today, and for the last 21 weeks – since mid-March ’16, the SP 500 is expected to grow EPS 14% in 2017, which would be the fastest rate of SP 500 earnings growth since 2011. (What is ironic about 2011 is that was the year the SP 500 corrected 20% through August – October and then had a monster Q4 rally to keep the index positive for the year.)
The estimates change daily, but with Q2 ’16 earnings all but concluded, the fact that the 2017 EPS estimate has seen a marked slowdown in its degradation, continues to bode well for prospective SP 500 returns, and I suspect some of the bid in the SP 500 this year and the breakout to the all-time-high might be reflecting an SP 500 improving earnings growth rate.
Yes, we can see a 5% – 10% correction at any time: the VIX is below 12, the charts are way extended (everything looks overbought), there is nothing in fixed-income that looks appealing given the yields and absolute levels of rates, but market corrections should still be bought in my opinion.
SP 500 earnings “Food for thought” – comments welcome.