Will 2020’s Expected 11% – 12% Growth Rate for SP 500 EPS Hold Up ?

Using IBES by Refinitiv data for years, there is always the question of what period do we (the collective “we” as in readers too) watch in terms of forward SP 500 earnings estimates to get a true take on the market ?

The answer is “all of them”.

This weekend, this blog took a look at the trends in Q3 ’19 SP 500 EPS and revenue estimates, but Q4 ’19 and 2020 are also being watched as well.

With Q3 ’19 earnings releases, some companies will give a first pass at 2020 guidance and then immediately follow-up with the comment “but we’ll have further color on the Q4 ’19 conference call”, hence analysts will be looking to update their models for 2020 as early as October ’19.

There will undoubtedly be plenty of negative blowback from blog and SeekingAlpha readers, but ignore the 2020 expected sector earnings growth rates at your peril.

However, what anyone has difficulty predicting is the degree of PE expansion or contraction” that occurs with a particular level of SP 500 sector earnings growth.

In 2018, SP 500 earnings grew 23% (14% organically per Factset) on the calendar year and the SP 500 fell 4.5%.

In 2019 (so far), SP 500 earnings are expected to grow just 1 – 2% this year, and yet the SP 500 is up 20%+ this year.

SP 500 earnings data (by the numbers): 

  • Fwd 4-qtr est: $171.14, down from $171.38 the prior week
  • Fwd PE: 17.5x
  • Fwd PEG: 14x
  • Fwd SP 500 earnings yield: 5.72% vs last week’s 5.70%
  • Fwd y/y gro rate:  +1.22% vs 1.55% last week
  • TTM PE: 18.9x
  • TTM PEG: 4x
  • TTM SP 500 earnings yield: +5.50% vs 5.47% last week
  • TTM growth rate SP 500 EPS: +4.07% vs +4.22% last week

Summary / Conclusion: When 2018 and 2019 is averaged as we did on the blog a few weeks back, and using the 14% organic return for SP 500 earnings for 2018, the last two years have been just “average” in terms of SP 500 earnings growth (+14% +2% = 16% / 2 = 8%) and SP 500 return (-4.5% + 22%) /2 = 8.75%. The 17x forward PE ratio results in the SP 500 today being pretty fairly valued, with depressed Technology revenue (see this weekend’s blog post linked above), which remains the largest sector at 20% of the SP 500 market cap.

The longer-term “average annual” return for the SP 500 remains below its long-term average, which should keep readers bullish.

Right now, looking at that unwavering 11% – 12% growth for the SP 500 earnings in 2020, as a first pass, I think we see an average year next year in terms of SP 500 total return. (I reserve the right to amend this with the final December ’19 forecast that is usually done the last few weeks of each calendar year.)

Since the 2020 11% – 12% expected growth rate has remained so constant, you should give it more weight as we head in Q4 ’19. The tariff issue with China matters. I worry about that since it is unlikely the full tariff’s are in the estimates and won’t be until the tariff’s are declared.

These are only opinions: be skeptical and judge the data for yourself. This opinion. I would like to see how Q4 ’19 earnings trends develop and change, with Q3 ’19 commentary, given Q4 ’18 saw the first quarter last year that we started to see a sharp deceleration in SP 500 earnings growth,

One positive tell for me is that high-yield corporates, (i.e the ETF’s like HYG, JNK, etc.) continue to hold up and have had positive returns. Recession worries would / might show up in the corporate high-yield asset class first.

The tariff tiff matters – that is the one fly-in-the-ointment.

Thanks for reading.

 

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