SP 500 Earnings Revisions Look Great: Stock Reactions Could Portend Weakness Ahead

Tech earnings this week from Microsoft (MSFT), Apple (AAPL) and Facebook (FB), were all strong beats. The stock prices after initial jumps after-hours couldn’t hold the gains. (long all three names. MSFT is biggest position.)

Here is the SP 500 Weekly Earnings Update (IBES data by Refinitiv):

  • The forward 4-quarter EPS estimate for the SP 500 jumped to $171.33 this week, from last week’s $169.79.
  • The PE on the forward EPS estimate fell to 21.6x after the 3.1% drop in the SP 500 this week;
  • The SP 500 earnings yield rose to 4.61%, from last week’s 4.42% and the highest since October 30th’s 4.8%. Sagging SP 500 values are driving the earnings yield higher, but strong upward revisions in the SP 500 EPS estimate are helping too. The SP 500 earnings yield has increased every week since the end of the year.
  • The combined 2020 / 2021 EPS estimates are still averaging 4.5% growth for the last two calendar years.

Let’s look at the data:

4-week rate of change for SP 500 forward EPS curve:

Note the 4-week and 12-week rates of change and their acceleration this week.

Those are hefty upward revisions.

Looking at forward quarter growth rate revisions:

The forward quarters for 2021 are still seeing higher revisions to SP EPS and revenue growth rates.

Summary / conclusion:  The upward revisions to SP 500 EPS estimates this week are robust to say the least. However the market risk posed by what is happening with Gamestop is not slight, if the information that Jim DePorre, the famed lead columnist at TheStreet shared late on Friday, January 29th.

Jim (@RevShark) DePorre for you Twitter followers, noted that a data analytics company published or noted on Friday, that the short-sellers are sitting on losses of $71 billion versus gains of $16.8 billion, and that Long-Term Capital Management, the John Meriwether hedge fund that blew up and resulted in a Fed bailout in  October, 1998, had losses not nearly as large as the losses today on Gamestop (GME).

One Twitter follower noted that the losses at LongTerm were just $3 billion in October, ’98, which surprised me, although other sell-side firms at the time had copy-cap positions on, following Meriwether and his two Nobel lauretes.

Is GME now systemic risk ? I can’t answer that from my perch, but as an aside, if you aren’t following Jim DePorre on Twitter, you should be, or even reading him at TheStreet. His trading skills are excellent and he makes readers money. I never traded with him since my ax for clients is large-cap blend, and Rev is strictly a smallcap investor, but I might at some point as we approach the end of this secular bull market. (Rev’s website I think is www.sharkinvesting.com.)

We last saw some weakness in September – October ’20, but the SP 500 and many laggard sectors this year really took off after the Presidential election on November 3, 2020.

The mega-cap Tech’s have range-bound since September 2nd and even this week’s earnings reports could do nothing to shake that range.

Stay with names that are seeing upward revisions to EPS and revenue estimates. Like the old saying, about the fastest man not always winning the race but it’s a good way to bet, stocks and companies with stable and consistent upward revisions to EPS and revenue estimates, are like beachballs that are being held under water. Eventually, they should pop higher with a rally.

Take everything you read here and on any blog with some skepticism and detachment. Data and markets change quickly as this week’s echo chamber that was Gamestop arose and captured the attention of CNBC and the media, which then got the attention of politicians, which then started the regulators yacking on TV, since regulators are appointed by politicians and they have to be seen as “doing something”.

Historically, it hasn’t taken much to change momentum for the markets.

Unofficially, January, 2021 had a negative return, which portends negatively for the SP 500 in terms of the full-year return.

Don’t forget that.

Thanks for reading.



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