The attached is a an article from Refinitiv’s (the old Thomson Reuters Financial’s) David Aurelio on Q4 ’18 SP 500 earnings, as well as what is expected in 2019. (Take a minute to read the short article.)
Here are the two important points I took from article:
1.) Removing the tax-reform induced boost to SP 500, what would be the “organic growth rate” for 2018 earnings and per the article, that answer is 14%, which is a little better than what this blog estimated in Sept 1 ’18.
2.) David makes the point about how Street consensus for SP 500 earnings is slow to be adjusted on both the up and the down side, using late 2017 consensus and then looking at how Street consensus changed in 2007 and 2008. That was the most important I took from the above article and actually should cause readers to stand up and take notice.
The point this blog has made in the last few weeks is that SP 500 consensus in terms of the forward estimate hasn’t changed much, thus either the bottom is in for the SP 500 based on fundamentals, or the consensus estimate for 2019 (currently $173.90) has to move lower.
SP 500 earnings data (Source: IBES by Refinitiv):
- Fwd 4-qtr estimate: $168.95 vs last week’s $169.58
- PE ratio: 14.7x
- PEG ratio: 2.07x
- SP 500 earnings yield: 6.80% vs last weeks 7.02%
- Year-over-year growth of fwd est: 7.1% vs last week’s 7.4%
Summary / conclusion: Ive talked to David Aurelio frequently over the years as the contact point for IBES by Refinitiv’s data, so its good to see David write his own article on what he sees from the data, much as John Butter does at Factset, who held David’s job when John was Thomson (now Refinitiv).
Not to be critical of David or anyone who writes about SP 500 earnings, but I’ve always thought using the 2007 – 2008 period when trying to predict a bear market was somewhat “anomalous” since the banking system was rotting from within and 2007 – 2008 was so unlike any other recession. 2008 was the worst post WW II recession and so very unlike the type of recession that is a function of the business cycle from the 1950’s – through the 1980’s.
Come to think if it though, has the US ever experienced a “normal” recession ? The late ’80’s, early ’90’s recession was a function of 1986 tax reform and the debt crisis of the late 80’s and was also rooted in the banking system ? The early ’80’s recession from ’80 to ’82 was a function of the sky-high interest rates after the inflation burst that started with the late 1970’s. The 1970’s was a function of OPEC, Watergate, and maybe the Vietnam War hangover. (I remember all those as a kid.)
is the move from 0% fed funds to 2.5% fed funds going to drive the US into a typical business cycle recession ? The trade talks are not helping at all.
What’s remarkable about 2018 using David’s article is that assuming the 14% (ex tax reform) SP 500 organic earnings growth rate, the PE on the SP 500 never really traded above 16x – 17x all year, in 2018. In other words, the SP 500 traded at 1 – 1.25x its PE multple for pretty much all of 2018.
With 2019’s current expected EPS growth rate of 7% (as of today) and the PE on the SP 500 being 14x, perhaps we move back into the more normal “PE expansion” for 2019 in terms of the SP 500 price action.
The bears will laugh, but given the fundamentals, the SP 500 still looks relatively attractive as we end 2018.
This blog still thinks this is a normal correction in an ongoing bull market, and there is too much pessimism around 2019.
The SP 500 “earnings yield” at the close on December 24th, 2018, was 7.20%.
That could all be wrong too.
Thanks for reading.