Q4 ’16 Earnings Now Less Important – Next 12 Months Could be more About P/E Expansion

Per Thomson Reuters, with 455 of the SP 500 having already reported their Q3 ’16 financial results, SP 500 earnings have grown 4.1% year-over-year, while excluding Energy, the SP 500 earnings have grown +7.7%.

This is pretty good earnings growth – well above what the Street was expecting.

On October 2nd, readers of this blog were told to expect this, but actual results have been slightly stronger for Q3 ’16, with the bigger retailers expected to report this week.

The 3rd quarter, 2016 earnings season will unofficially end with Walmart’s earnings release scheduled for this coming Thursday morning, November 17th, before the market open.

Here is the thing though: as readers could tell from the market action this week – actual earnings reports for Q4 ’16 – take on much less importance than the fiscal policy and Republican reform agenda that will surely follow in the next 90 – 100 days.

The SP 500 ended 2014 – 12/31/14 – at 2,059. The SP 500 closed on Friday, November 11th at 2,164, for a 5% increase over a 23 month time frame.

The SP 500 has essentially been flat, trading around the “2,000” print going on two years now.

The point of this lesson being that with the collapse in crude oil and the Energy sector, SP 500 earnings have been flat for 2 years, and if we exclude Energy, SP 500 earnings have grown about 4% – 5% over the last 2 years, pretty much inline with the return on the SP 500.

In other words, the SP 500 has pretty much walked up the chart with the degree of “Ex-Energy” earnings growth. There has been little P/E expansion, and on occasion, P/E contraction.

That could change now: without getting into the politics of the last election, the Republican’s are likely to follow their typical, “pro-business” agenda, which COULD mean corporate tax reform, a lowering of individual tax rates for all Americans, and the already-commented upon reform of Dodd-Frank, and the Affordable Care Act.

We saw some knee-jerk reactions last week in the Sp 500 with Financials and Industrials now dramatically overbought (per the Bespoke Report).

Biotech has its best week ever – and the thing is NONE of this is earnings-related, yet.

I do think we are entering a period over the next 90 – 180 days that will be more “macro” over “micro” (i.e. individual company-driven) and that makes investing much harder for stock pickers.

Sector ETF’s and the various indices might be better investment vehicles over the next 3 – 6 months to play specific macro themes (less regulation, Financials, auto’s, or less government support i.e. Solar, and the potential loss of the tax credits, etc.)

The point of all this is that I will continue to update the SP 500 earnings data every week, but I do think watching nuanced changes in sector growth will be less telling in the near term.

Watch that “forward 4-quarter estimate” though – this metric will take on more importance after the results of Tuesday night, November 8th, 2016.

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Thomson Reuters data by the numbers:

  • Forward 4-quarter estimate: $128.43 vs last week’s $128.56 – the forward estimate remains rather stable which is a plus for forward earnings expectations
  • P.E ratio: 16.85(x)
  • PEG ratio: 4.5(x) 
  • SP 500 earnings yield: 5.93% vs last week’s 6.05%
  • Year-over-year growth of forward estimate: +3.69% vs last week’s 3.59%. 

Analysis / conclusion: with the SP 500 being a discounting mechanism, the benchmark should be out in front of any “macro” policy changes, meaning tax and regulation reform. A lot is going to change over the next 6 months, particularly from a business environment perspective, and much of the Washington agenda should be “pro-economic-growth” which should translate into faster SP 500 earnings growth.

Investors got a look at the potential big winners this week, in terms of Financials and Health Care.

The Technology trade this week was puzzling but somewhat understandable.

Any popular trade the last few years like the “safety” trade (Ute’s and dividends) or the investment-grade bond fund trade, or the “yield” trade (corporate high yield (up to a point), bank loans, etc. are to be avoided.

Here is a blog post from August 27th, 2016 that looks pretty good 10 weeks later.

Thanks for reading.

 

 

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