SP 500 Earnings: There Has Been Little Downward Pressure on SP 500 Earnings Estimates

Looking at overall SP 500 estimates for the 3rd and 4th quarters of 2018:

Q3 ’18: 

  • As of 10/5/18: +21.5% y/y growth expected for SP 500 EPS
  • As of 10/1/18: +21.6% y/y growth expected for SP 500 EPS
  • As of 7/1/18: +23.5% y/y growth expected for SP 500 EPS
  • As of 4/1/18: +22.1% y/y growth expected for SP 500 EPS

Q4 ’18: 

  • As of 10/5/18: +20.0% y/y growth expected for SP 500 EPS
  • As of 10/1/18: +20.0% y/y growth expected for SP 500 EPS
  • As of 7/1/18: +20.2% y/y growth expected for SP 500 EPS
  • As of 4/1/18: +19% y/y growth expected for SP 500 EPS

Looking at the data from January 1 ’18 to April 1, the Street consensus for expected growth rates rose sharply in Q1 ’18, despite the sharp drop in the SP 500 in early February ’18 and has now settled into the stable growth rate since April 1st. The thing is though, unlike the typical pattern for SP 500 forward estimates, which usually see negative revisions as we approach a particular quarter, and then get revised higher once the quarter begins, there has been little downward pressure on estimates.

Here is Factset’s article from October 1 ’18 saying as much, but I wanted to show readers the Thomson Reuters IBES data as well: https://insight.factset.com/analysts-made-smaller-cuts-than-normal-to-eps-estimates-for-sp-500-companies-for-q3?utm_campaign=Insight&utm_source=hs_email&utm_medium=email&utm_content=66337562&_hsenc=p2ANqtz-9pXKr1hsSjGJG-518Mg2UCzZwfhAXXGyO47p9nYFPk8cj3VGInSirM6ekOWHriagvb6PyvCyxFVdpb3ldLILMsOyuybw&_hsmi=66337562

Here is the latest SP 500 earnings data tracked by this blog each week:

  • Fwd 4-qtr est: $173.61 as of 10/15/18, vs last week’s $168.72 and consistent with our article this week.
  • PE ratio: 16.6x
  • PEG ratio: 0.74x
  • SP 500 earnings yield: 6.02% vs last week’s 5.79%
  • Y/y growth in fwd estimate: +22.37% the third straight week where the y/y growth of the forward estimate declined.

Summary / conclusion: Investors saw a rotation this week away from growth and Tech, while Financials did better (finally !) but it is still a small rotation given the move off the Q1 ’16 lows. The SP 500 fell 1% while the 10-year Treasury yield took out major resistance between 3.11% to 3.22% so interest rates and Treasury yields could be the focus of investors going forward.

But here’s the rub: the SP 500’s “earnings yield” jumped back above 6% with Friday’s close and there is little downward pressure on forward earnings estimates which makes sense, since we have NOT seen many negative preannouncements from major SP 500 components.

In fact most of what little SP 500 weakness there has been seems to have been attributed to the stronger dollar, rather than any tariff issues or economic weakness. Currency changes are at first “translational” and only after longer periods become “economic” meaning that the currency strength or weakness takes a while to effect operational changes on an SP 500 component.

Remember (again) in Q1 ’18, we saw a sharp rise in “expected”, full-year 2018 earnings growth thanks to tax reform, even though the SP 500 chose that January – February ’18 period to correct 10% – 11%.

SP 500 earnings estimates are NOT a precise market-timing tool. Market’s correct and do so frequently.

2019’s expected SP 500 earnings growth is expected to slow as we lap the reduction in the corporate tax rate from the 30% to 21%. That is what current estimates are telling us and it’s been built into the numbers for some time.

So far – for the last 2 quarters of 2018 and full-year 2019 – there is little evidence of an issue with SP 500 earnings.

Thanks for reading.

 

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