SP 500 Earnings Update: Need That “Forward Growth Rate” to Start Climbing

As was covered yesterday in a broader blog post on sentiment around Q3 ’19 SP 500 earnings before the first full week of reporting begins, expectations around Q3 ’19 SP 500 are quite low – which per Bespoke – is a good sign for a positive return for the SP 500 for the 4th quarter.

That being said, as the reader will see with the following metrics, the one metric I’d like to see start to rise is the growth rate of the “forward 4-qtr estimate”.

When the “forward 4-qtr” growth rate starts to expand over the 52-week prior number, should be when the PE on the SP 500 starts to expand.

SP 500 data (by the numbers) courtesy of IBES by Refinitiv

  • Fwd 4-qtr est: $175.11 vs last week’s $175.49
  • PE ratio: 17x
  • PEG ratio: 19x
  • SP 500 earnings yield: 5.90% vs last week’s 5.94%
  • Y/Y Growth of Fwd estimate: +0.89% vs last week’s +1.09% (too low – hasn’t risen for some time)

 

  • TTM est: $162.57 vs last week’s $162.86
  • TTM PE: 18x
  • TTM PEG: 2.2x
  • TTM SP 500 earnings yld: +5.47% vs +5.52%
  • Y/y growth of TTM est: +7.71% vs 7.76%

With Financials starting to report en masse on Tuesday, October 15th, when we will hear from 5 of the 23 scheduled Financial names to report between October 14 – October 18, the expected y/y EPS growth rate for the sector (per IBES by Refinitiv) is +1.2%, which is expected to rise to +14.7% in Q4 ’19.

The strong growth expectation for Q4 ’19 was surprising.

Expect the 3rd quarter growth rate to rise for Financials and then the 4th quarter growth rate to fall somewhat, but also remember, it was Q4 ’18 that saw the SP 500 correct 13% last year thus capital market activity might get a nice boost from an easy compare to Q4 ’18.

IBES had the actual Financial sector revenue growth at -4% for Q4 ’18 with a -1% revenue growth rate expected for Q3 ’19.

Let’s see if we get revenue “upside surprises” within the Financial sector for Q3 ’19.

Summary / conclusion: The 5th bullet point above which shows the y/y growth rate of the “forward estimate” down to less than 1%, is an issue. The last time that metric was this bad for any length of time was coming out of Q1 ’16 SP 500 bottom. The forward estimate was even negative for several months in 2016. This is a potentially big week for SP 500 earnings given that Financials are cheap as a sector (see our mid-August ’19 blog post here) so if the Financial sector – 12% of the SP 500 market cap – can see higher growth rates for forward quarters (i.e. Q4 ’19 and 2020) it might help start to lift the compression we are seeing in forward estimates.

It’s unusual to see such tight compression in the “forward 4-quarter growth rate” versus it’s 52-week prior number.

If we compare the growth of the “trailing twelve month” (TTM) EPS (last bullet point), it looks much healthier and more in line with the long-run average of the SP 500, and might give better insight into the poor sentiment around forward earnings.

Ex-Energy, for Q3 ’19 SP 500 revenue growth is expected at 4.6% and SP 500 EPS at -1%.

Expectations seem far too subdued and pessimistic to me, but let’s see what guidance looks like after Friday morning releases are done.

Thanks for reading.

 

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