Updating the numbers this holiday weekend, the expected 2019 SP 500 estimate today is $162.20 vs 2019’s actual tax-cut-aided $161.93, so there is now a whopping difference of $0.27 between the two years actual SP 500 EPS, which puts 2019’s expected SP 500 EPS growth rate below 1% as of this weekend.
Assuming Factset’s 14% “organic growth rate for 2018 is accurate (and Factset is a quality firm, so there is no reason to expect the earnings team just threw this number out there), 2018’s “true” EPS should have been around $150.48, which is arrived at by multiplying 2017’s actual SP 500 EPS of $132 by 14% (1.14) which leaves us with $150.48.
As a result, 2019’s expected EPS today of $162.20 (and we don’t have 4th quarter ’19 numbers yet) is roughly 8% y/y growth, when adjusting for the impact of 2018’s Tax Cuts & Jobs Act (TJCA).
No doubt there will be some push-back on this and howls of protest, but the math is simple and self-explanatory.
SP 500 data (by the numbers):
- Fwd 4-qtr EPS: $171.89 vs last week’s $172.56
- Fwd PE: 18x
- Fwd PEG: 35x (this will be explained shortly)
- SP 500 earnings yield: 5.47% vs last week’s 5.55%
- Y/y Growth of Fwd Est: +0.51% vs last week’s +0.75% (This is the primary reason the PEG looks so high – comparing the 52-week estimate today vs the 52-week estimate prior shows just 1/2 of 1% y/y growth, which divided by the 18x PE leaves you with a 35x PEG. Remember this calculation divides today’s “fwd 4-qtr est” by the same number 52 weeks prior.)
- TTM EPS: $163.88 vs $163.99
- TTM PE: 19x
- TTM PEG: 3.7x
- TTM SP 500 earnings yield: 5.22% vs 5.27%
- Y/Y growth of Fwd Est / TTM Est: 4.89% vs last week’s 5.23%
Summary / Conclusion: This should have been done months ago, but today’s blog post was really a way to clarify “organic earnings growth” for the SP 500 for 2018 and 2019, after adjusting for TCJA. So many mainstream media pundits just look at the calendar year growth rates and give their commentary picking out data to support their bullish / bearish view, but tax reform was really a meaningful event from an SP 500 earnings perspective. Even without tax reform, SP 500 earnings grew 14% in 2018 (again per Factset) and adjusting for that, this year’s growth was pretty average at 8%. Not great but not as terrible as you’d think either.
Tomorrow this blog will take another look at 2020’s SP 500 sector estimates and we’ll see what’s what.
Thanks for reading.