Another perspective on SP 500 earnings

Year S&P 500 Ex-Energy Energy %
2014 118.78 113.77 4.2%
2015 117.46 104.89 10.7%
2016 118.32 117.36 0.8%
Source: Thomson Reuters I/B/E/S


The current estimate for 2017 as of this weekend is $131.07, which is 11% expected SP 500 earnings growth, and with a small contribution to earnings (in dollars) from Energy.

Eddie Elfenbien of “Crossing Wall Street” fame put out a blog post Friday, March 10th, much of which I’m agreement with in terms of his earnings analysis. Here is a part that I thought readers should have a look at (hope Eddie doesn’t mind):

Commentators love to proclaim that the stock market, and every market really, is a bubble. Hey, it’s an easy call to make. You’re rarely held accountable if you’re wrong. Also, you have an easy out. If the market goes higher, then you can always say that the bubble and ensuing crash will be that much worse. The crash is always just around the corner.

I’ll let you in on a little secret. The stock market is rarely a bubble. Don’t get me wrong—the market takes its lumps. You can expect a 20% selloff every few years. But that’s not necessarily a bubble.

For example, the big bad bear market of 2007 to 2009 wasn’t, in my opinion, preceded by a bubble. By that, I mean that I don’t believe equity valuations were excessive. Prices largely reflected fundamentals. The problem is that the fundamentals crashed. Sure, there was a bubble, but it was in real estate. Or more precisely, it was in credit, which manifested itself in real estate. But stocks? Nope, nothing crazy.

For those of you who remember 1999-2000, now that was a bubble. The valuations had no bearing on reality. The flimsiest companies were going public. Why? Well, they were being funded! No one wanted to be left out. “Your company is nothing but a URL and a sock puppet? Here, take a few billion dollars.“

That’s what a bubble is all about. The tech bubble was so intense that it actually pulled money away from sensible value stocks. I remember that several REITs were yielding over 10% or 12%. My point is that a bubble isn’t merely elevated valuations but totally crazy, insane valuations. That happens, but it’s rare.

Now back to this market, and let’s bust out some math. The S&P 500 closed Thursday at 2,364.87. Last year, the S&P 500 earned $106.64 per share. That’s the index-adjusted number. The issue is that profits last year were held back for a variety of reasons, and we should expect a decent earnings rebound this year and next.

For 2017, Wall Street currently expects the S&P 500 to earn $130.67 per share. For 2018, the expectation is for $148.35 per share. Let me add an important caveat: Wall Street’s earnings are notoriously optimistic, especially that far out. It’s typical to see estimates gradually pared back as earnings day approaches.

With that in mind, I think the Street’s estimates are reasonable, and that’s what we’re looking for. If the Street’s estimate for 2018 is accurate, that means the S&P 500 is currently going for 16 times next year’s earnings. To my mind, that’s a bit above average, but it’s hardly excessive. Let’s also remember that earnings estimates could be too pessimistic. The earnings estimates for Q3 and Q4 of this year are already higher than they were at the start of the year. It’s been a while since I’ve seen estimates go up!


The opening part of tonight’s post shows the actual SP 500 earnings print for each year as a whole, and then “Ex-Energy”.

The Energy sector drag on earnings – which Eddie didn’t talk about and has been written here consistently the last 18 months – is now over. Crude oil fell from over $100 in early September ’14 to $28 by mid-January 16, thus we would need crude oil to fall below $10 per barrel to see the same rate of decline.

Here was yesterday’s blog post, where I talked about the increase in the forward earnings growth rate and what tax reform could add to the EPS growth rate in 2017.

Eddie does a nice job with his blog – it is nice to see someone who got to a similar conclusion on SP 500 earnings, albeit with a slightly different perspective.

Crossing Wall Street raised one good point not written here yet yet on this blog: the Thomson 2018 SP 500 estimate is currently looking for 12% growth.

That will bear watching. Last year it was in May ’16 where this blog wrote about the stability of the 2017 estimate. Some Seeking Alpha readers were pretty blunt and told me I was nuts to think that the 2017 SP 500 EPS estimate would grow 14% this year. While that has come down a little, tax reform, which I don’t think is in 2017 estimates currently, would boost that growth rate.

Thanks for reading.








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