6.22.13: SP 500 Earnings Update: Can Earnings Growth Offset Rising Interest Rates and Fed Impact on Stock Market Valuation ?

Interesting Stat – look for a bounce in the SP 500

Interesting statistic out of Bespoke this weekend: we had back-to-back 1% declines in the stock market last week on Wednesday and Thursday: since March, 2009 there have been 21 such times of back-to-back declines, but over the next day (would have been Friday, June 21), the SP 500 averaged a gain of 0.99% with positive returns 71.4% of the times, and over the next week, the index has averaged a gain of 1.56% with positive returns 57.1% of the time.

With end of quarter, Friday, June 28th, the probability is better than 50% for a nice bounce in the SP 500.


SP 500 Earnings Yield back above 7%

Per ThomsonReuters, the forward 4-quarter estimate for the SP 500 was little changed this week at $113.30, down slightly from last weeks $113.32.

The p.e ratio is 14(x) the forward estimate, for expected 7.5% earnings growth in 2013.

The earnings yield is now back over 7% to 7.11%.

The year-over-year growth in the forward estimate continues at 5.10%. This is a good sign.

One thing that struck me last week and this week regarding Q2 ’13 estimates, is that earnings growth for the SP 500 is now estimated at +3.2%, for the June quarter, which starts getting reported mid-July. Normally by now, at least in terms of the last 3 quarters, the expected estimate for the next quarter was closer to zero growth.

Earnings estimates are holding up pretty well, and that “4-quarter forward” estimate is now growing again year-over-year.

With 498 of the 500 S&P companies reporting Q1 ’13 earnings, Q1 ’13 earnings growth is +5.4% on flat revenue growth.

Q2 ’13 SP 500 earnings growth is expected at +3.2%, with Telco and Financials both expected at +18% earnings growth for the June quarter.

Regarding today’s stock market, I dont think earnings are the issue at all, in fact SP 500 earnings should start to become a positive factor.

Tough Time in Fixed-Income – most bond classes getting oversold

A tough week for interest rates as everyone knows. The action was ugly with a 37 basis point increase in the 10-year yield, just last week alone.

Could what is happening iwth China’s SHIBOR, be a function of the taper here in the US ? Interesting graph and brief description from EconBrothers on what is happening over in China.

Here are 1-month returns for various fixed-income asset classes per EconBrothers, and SoberLook. Not a pretty picture. Mortgages are holding in best. We are long the TBF for clients, which has hedged a lot of this pain.

One-week returns

IEF 7-10 year Treasury -3.14%

TLT 20-year Treasury -4.76%

PIMCO 25-yr zero-cpn -6.51%

AGG (Barclays Aggregate) -1.99%

LQD (iShares Hi-Grade) -3.91%

MUB (muni bond ETF) -4.67%

HYG (Hi Yld Corp) -2.87%

JNK (Hi yld Corp) -2.69%

HYD (Hi yld muni) -7.23%

TBF (Inverse Treasury) +4.78%

TBT (Inv Treas levered) +10.08%

Glad we own a good slug of TBF – it is getting ugly out there. A whole lot of folks now looking for a bounce in here in fixed-income too.


Of the three companies that reported their May ’13 quarter end last week, only one could have been considered decent, and that was Micron (MU). Fed-Ex (FDX) and ORCL were pretty uninspiring and cautious on guidance. However, neither ORCL or FDX’s guidance and caution impacted earnings estimates to a great degree.

We still like ORCL although it is a small position for clients. Here is Scott Redler’s take – like the short summary and graph of ORCL earnings. We will be adding to ORCL over the next few weeks and months trying to buy in the high $20’s.

A bunch of retail reports this coming week including Walgreens (WAG), Bed Bath & Beyond (BBBY) and Nike (NKE) and my own opinion is that all are fairly valued. Much of retail’s outperformance has come from the fact that a lot of retail is 100% US-based revenues. That is the segment of the SP 500 (all US revenue) that has performed the best year-to-date. We wouldn’t initiate fresh positions in any of the above-three names until we see lower prices.

Retail typically doesn’t trade well in rising rate environments either.

Lennar (LEN) reports this week as well. Here is our earnings preview on LEN. The stock looks like it is now bottoming, given Friday’s action. LEN was down 9% alone last week. TOL was down 3.5% last week. We haven’t repurchased our positions sold in late May, as we noted here.

Our headline for this weekend’s blog is addressed by this graph courtesy of Jeffrey Kleintop, LPL Financial’s Strategist. Corporate earnings and job growth matter when it comes to the economy, and more importantly the stock market. With the Fed taking off the training wheels, expect support from others legs of the stool, but perhaps a wobbly ride in the interim.

Great chart by Norm Conley on the oversold nature of the US stock market towards the end of last week.

Jeff Miller articulates the weekly action perfectly in A Dash of Insight this weekend.

Josh Brown, TheReformedBroker, with another thoughtful piece on today’s market. I’m amazed at the volume and the content of Josh’s production every week. I thought I wrote a lot…

Two guys whose stuff i try to read every week is Bob Lang, found on TheStreet.com and here at www.explosiveoptions.net, and Dan Fitzpatrick of www.stockmarketmentor.com. I’m amazed at how much talent has moved in and out of TheStreet.com through the years. A credit to Jim Cramer and the staff there.  Bob is an options trader, while Fitz is an an excellent technician.


To wrap up the weekly notes, ThomsonReuters used to publish something called a “Thomson Market Risk Premium” (TMRP), the formula for which is the inverse of the forward p/e ratio, plus the S&P 500 long-term earnings growth rate (we assume 7%) and then subtract the yield on the 10-year Treasury. I do believe this formula lost a lot of relevance with ZIRP (zero interest rate policy) by the Fed, but we still track it.

The point is that the current TMRP is 11.6%, down from 11.81% last week, despite the drop in the SP 500. Normally the TMRP would see a nice pop after a selloff like we’ve seen in the SP 500 since May 21. The difference was the 37 basis point increase in the 10-year Treasury yield this week. Higher rates have (in my opinion ) a temporary, suppressing affect on equity prices.

The SP 500 and earnings growth are like a beach ball being pushed under water right now. The SP 500 will correct on sharply higher interest rates, but as soon as rates stabilize for a bit, the SP 500 should pop right back.

Like all equity risk premiums, the higher the value, the more attractive the SP 500 as an asset class. The TMRP hit a low of 2% in March 2000, and has been trading trading between 11% and 15% since the 2008 Recession.

Stocks are still attractive as an asset class, and will remain so for a while, both on an absolute basis and relative to fixed-income.

There is a lot of pain in BRIC, (graph courtesy of Norm Conley) particularly China, and the EEM right now, although we think Europe and Japan are recovering. Developed economies should be overweighted versus emerging, but really the US and the SP 500 are the best places in the world to invest right now in terms of equities, and in terms of broad asset classes.

The China and SHIBOR issue might be a concern. Could China be the new Lehman ?

We’ll leave you with that thought.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager





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