6.8.13 SP 500 Earnings Update: 5% SP 500 Earnings Growth the Norm Right Now – It Will Get Better

The “forward 4-quarter earnings estimate” for the SP 500 slipped to $113.22 last week, from $113.38 the week prior, as the SP 500 rose 0.78% over the last five trading days.

The forward p.e ratio is now 14.5(x).

The “earnings yield” of the SP 500 using the foward estimate is now 6.89%.

Year-over-year growth in the forward estimate ticked up again to 4.73%.

Few SP 500 companies report this week, and very few reported last week. 494 of the SP 500 companies have now reported Q1 ’13 results, with first quarter, 2013 earnings growing 5.0%, while revenues were flat year-over-year.

Stat of the week:

We track year-over-year growth of the forward estimate of the SP 500, and it has begun to grow once again. Market movements don’t correlate precisely with earnings, but I’ve always felt that the forward estimate needs to grow for the market p.e to expand, or at least to provide a framework for p.e expansion.

6/7/13: $113.22 +4.49%

5/31/13: $113.38 +4.20%

5/24/31: $113.43 +4.13%

5/17/13: $113.56 +4.04%

5/10/13: $113.57 +3.73%

5/3/13: $113.84 +3.79%

4/5/13: $115.25 +5.19%

3/1/13: $112.39 +6.10%

2/2/13: $112.47 +5.86%

1/4/13: $113.88 +5.45%

11/30/12: $109.42 +4.67%

10/26/12: $111.14 +5.54%

9/28/12: $107.89 +3.20%

8/31/12: $108.02 +1.92%

8/3/12: $108.23 +1.08%

The progression of the above numbers shows the date of the estimate, the forward estimate itself, and then the y/y growth versus the forward estimate 52 weeks prior.

The bottom of the year-over-year earnings growth of the forward estimate of the SP 500 off the March, 2009 market low occurred on August 3rd, 2012, when the estimate reached its growth nadir of 1.08%. It accelerated again through early March ’13, took a pause and has now turned higher.

The key week will be when the forward estimate growth rate succeeds the old high of 6.10% from March 1 ’13.

We’ve been growing on a year-over-year basis since then, albeit at a less-than-robust 5% rate the last two quarters.

Earnings growth rates for SP 500 (estimated and historical)

Q4 ’13: +12.1% (current estimate)

Q3 ’13: +8.2% (current estimate)

Q2 ’13: +2.8% ( current estimate)

Q1 ’13: +5.0 (494 of 500 reported)

Q4 ’12: +6.3%

Q3 ’12: 0.1%

Q2 ’12: +8.4%

Q1 ’12: +8.1% (Ex Apple, thought to be closer to 3%)

Q4 ’11: +9.2%

Q3 ’11: +18%

Q2 ’11: +12.1%

Q1 ’11: +18.9%

My guess is we will do at least 5% in 2013 in terms of SP 500 earnings growth, but possibly as much as 10% as we head into the 2nd half of 2013, based on the easy compares versus last year. Split the difference, assume 7.5% earnings growth and the SP 500 looks fairly valued at 14(x) forward estimates. However…

We think it more likely that SP 500 earnings will slowly gain strength as late 2013 becomes early 2014, based on a strong US consumer, Europe stabilizing, and Japan improving.

It sure looks like we have settled into a 5% – 6% earnings growth routine. Anything stronger, upwards towards 10%, and the SP 500 p.e can expand further.

Remember, a 10% growth rate in SP 500 earnings, means a 20(x) p.e ratio leaves the SP 500 looking fairly valued.


We left a number of links out of this article, but we still like Financials. The sector doesn’t ypically trade well when interest rates rise, however that was the 1980’s and 1990’s model. Higher rates might help (than hurt) the banks more today.

  • US bond funds suffered their 2nd worst redemptions since 1992, per Bloomberg article, last week. Ouch… Can this many people be right ?
  • If everyone is right on the end to the 30-year rally in Treasuries and interest rates, it would have to be the first time, so many, have been so right, at the right time. Only Gundlach still thinks the 10-year can rally.
  • A whole lot of folks on the same side of this bond trade…

Brilliant chart from Norm Conley of JA Glynn: Inflation-adjusted SP 500 returns are just now edging above March, 2000 levels.

Ultimately, I think the SP 500 goes much, much higher.

This is what worries me about earnings data: this chart from Norm Conley shows different numbers than my data, above. Everybody I seem to talk to regarding earnings-related metrics has different numbers. At least my data is fromThomsonReuters, the original FirstCall source, and we’ve used the same reference doc’s for over 13 years.

A great list of picks from Ryan Detrick of Cincinnati’s Schaeffer’s Investment Research. Great technician. Remember, technical analysis, like a lot of investment tools, is just another arrow in the portfolio management / risk management quiver.

We’ve been telling readers that CME was a higher interest-rate beneficiary, both here last fall and here. CME is on Ryan’s list. Stock is starting to move.

FB is oversold. Bought more last week. Story is not readily understood. We continue to add to the position.

 Here is our sale of Pfizer in early February, 2013. Looks pretty shrewd now. Recently sold some MRK at $47, about half our position. Might regret that one… (Long PFE, MRK)

WMT held their annual meeting on Friday, and announced a $15 billion share repurchase program. This wasn’t unusual or unexpected, i.e. their last share repo program was June, 2011 and was for $15 bl. WMT generates anywhere from $12 to $15 billion in free-cash-flow per year, with about half going to the dividend, so it generally takes about 24 months to get through the $15 billion. Still long the stock and love the fundamentals. (Long WMT)

We have exited most of our homebuilder exposure. Rising rates and falling lumber prices has thrown a scare in the sector. Here is one article we’ve written on the sector and here is another article we posted on Hovnanian last week, that shows the degree they are diluting shareholders. The group seems pretty overvalued too. I would love to own them again, just at lower prices. (Long small positions in LEN, TOL.)

SoberLook Chart on the 30-year conforming mortgage chart – ouch. Above 4%.

Interesting article pulled from Josh Brown’s blog on the 10 things economists won’t tell you. #6 or #7 is the most important one, i.e. both political parties “data mine” to support their desired policies. Economists are as human as you and I. Their biases and political leanings come out in their forecasts. Politics is economics and economics is politics. I think it was Peter Lynch who once said that if you spend 5 minutes studying economics relative to your portfolio and investing strategy, you’ve wasted 5 minutes. Not sure I agree with that completely, but I have found it interesting that – over my 25 years in the business – I’ve never seen a quote from a Fidelity economist.

Per the above, SP 500 earnings growth seems mired around the 5% range the last two quarters, and the forward growth estimate is near 5%. We need to see a higher growth rate to push the SP 500 higher. I think it happens later this year.

Thanks for reading and stopping by.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager












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