Per ThomsonReuter’s, “This Week in Earnings”, the “forward 4-quarter estimate” for the SP 500 earnings is now $113.14, down $0.16 from last week’s $113.30.
The p.e ratio on the forward estimate is now 14(x).
The “earnings yield” remains over 7% closing at 7.04% as of Friday, June 28th. (If you wonder why “earnings yield” matters, compare the 7.04% SP 500 earnings yield to the 2.5% yield on the 10-year Treasury, and think “Fed Model”.)
The year-over-year growth of the forward estimate continued to tick higher at 5.21%
Next week, when we get turn the calendar into July, the “forward 4-quarter” estimate should jump to the $117 – $118 neighborhood. Each quarter, as we end the current quarter and lap into the next quarter, and given the upward bias to the forward estimate, we see a $3 – $4 increase in the forward estimate. Here is the historical pattern looking back 15 months:
June 28, ’13/ July 5, ’13: $113.14 and ? 14(x) and ?
Mar 29 ’13/ Apr 5, ’13: $111.84 and $115.25; 14(x) and 14(x)
Dec 28 ’12/ Jan 4 ’13: $108.83 and $113.88; 13(x) and 13(x)
Sep 28 ’12/Oct 5 ’12: $107.89 and $112.26; 13(x) and 13(x)
Jun 29 ’12/ Jul 6 ’12: $107.25 and $110.94; 12(x) and 12(x)
Mar 30 ’12/ Apr 6 ’12: $105.67 and $109.27; 13(x) and 12(x)
The reader can quickly see the quarterly jump that occurs in the forward estimate as one quarters falls off and another is added, but also the prevailing p.e ratio’s for the market as we roll into each quarter.
A lot of pundits have said the SP 500’s rally this year is “p.e expansion” driven, which isn’t entirely inaccurate. Earnings growth has been the main driver in our opinion, with modest p.e expansion at critical points.
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With 498 of the 500 SP 500 companies having reported, actual year-over-year earnings growth for Q1 ’13 was +5.4% versus an estimate on April 1 of 1.5%. Revenue growth was flat in Q1 ’13, and continues to be a concern.
Q2 ’13 earnings growth is currently projected at +3%, which is actually a little higher than the q3 ’12, q4 ’12 and q1 ’13 initially projected as those respective quarters started: the initial estimate was flat to 1.5% as each of those quarters began.
Financials and Telco continue to lead the expectations for Q2 ’13 with +17.8% and +18.2% sector earnings growth respectively.
Here is the progression for each of these sectors since Jan 1, ’13, Apr 1, ’13 and June 28, 13:
Financials: +19.2%, +17.6% and +17.8% (If Investment Banks and Diversified Finance are removed, then y/y growth for Financials is 11.3%, still much better than the Sp 500 as a whole.)
Telco: 15.7%, 13.4% and 18.2%
Telco sector earnings expectations have actually gained strength in the quarter, while Financial sector earnings growth has remained steady since April 1, ’13.
Our assumption is that q2 ’13 SP 500 actual earnings growth will come in at +5% – 7% for the quarter, when the majority of earnings reports are concluded by mid-August ’13.
Another assumption we have is that either the 3rd or 4th quarter of 2013 will see 10% year-over-year earnings growth for the SP 500.
Our final assumption is that Financial sector earnings growth will come in quite nicely for q2 ’13 and be up at least 20% to 25% for full-year 2013, versus the current full-year 2013 estimate of +18%.
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Best q2 ’13 sectors: Financials, Consumer Discretionary and Healthcare, as measured by the SPDR ETF’s. The GLD was down a whopping 22% in the 2nd quarter, and 26% YTD. (No exposure in GLD, still overweight Financials.) Most bond / fixed -income ETF’s are down high single-digits year-to-date, despite the screaming. Not too bad (yet). We sold a chunk of our gold at $1,650 and then near $1,600. Here is the reason, in terms of how it was trading vis-a-vis other asset classes.
The 60% / 40% balanced portfolio: A good article found on Norm Conley’s (@Jag_Norm)’s Twitter feed on how the 60% / 40% balanced portfolio is doing of late. We had a good 2nd quarter for clients after running some numbers late Friday night. Our bond short or TBF helped nicely in balanced accounts. (Overweight equities in the 60% / 40% standard portfolio, which implies a 65% / 70% weighting, depending on the client.)
Credit Quality and High yield: In terms of credit-quality and credit trends in the US corporate bond markets, Christina Padgett, a Moody’s (MCO) Senior Vice President, published a research note this week stating that the number of B3 rated companies grew to 160 companies, but this relatively low number continues to reflect “overall stable credit conditions for US speculative-grade companies”. As a former credit analyst before moving over to the dark side (i.e. equities), my own opinion is that the rating agencies are still in shock over the 2001 – 2002 Recession (where Worldcom defaulted thanks to masive fraud), and then the 2008 Financial / Mortgage Crisis, both seismic events which resulted in a massive re-thinking of the credit rating methodology. As a credit analyst for both a small sell-side broker-dealer in Chicago and then with a larger mutual fund firm here in Chicago, I had the chance to understand the rating agency methodology and how the rating agencies arrive at the ratings they do. My own opinion is that the two credit shocks of the last 12 years – not to mention the two equity bear markets – should prolong the next credit cycle. The rating agencies are uber-sensitive today and are very ready to yell “fire” in crowded theatres. Like the general lack of enthusiasm for stocks even though the indices sit at all-time highs, worries grow daily over the high yield market credit conditions. To me, that is a good sign. We have always respected Moody’s and John Lonski’s work. If you think trading the stock markets is tough, try being a credit analyst the last 12 years. Yowser. (Still overweight high yield, but have been selling funds and buying ETF’s.) The HYG was down 3.35% in Q2 ’13.
Muni’s and state pension deficits: Alan Schankel tweeted this week that, according to Moody’s, the states with largest pension deficits as a percentage of revenues are Illinois (241%) and Connecticut (190%). The Illinois GO deal that came this week was 8(x) oversubscribed per one source. $1.3 bl deal with $8 billion in orders. As a Chicago, Illinois resident, that could only mean that higher taxes are down the road. Alan was quoted in Barron’s this weekend, right here. (Subscription required).
SP 500 correction: The correction in the SP 500 is 5 – 6 weeks long, and the uptrend off the November ’12 low is still intact. I do think Monday’s action and where the SP 500 closes this week will be critical. The SP 500 uptrend line off the March ’09 low is all the way down at 1,400 – 1,450, or 150 to 200 SP 500 points lower. That would be a hefty drop, but it would put a bid back under Treasuries.
Inflation: for those who think we have an inflation problem, here is a chart found on Bob Brinker’s Twitter feed that shows the year-over-year Core PCE and the PCE deflator. Those touting gold for the last $600 – $800 drop have missed the fact that inflation is still falling. This also calls into question the “tapering” message by the Fed. It looks like deflation is still an issue.
Ford (F): another good article from Reuters pulled off Bob Brinker’s Twitter feed. If only Europe would stabilize and I think it is, F could make another run at $18 per share, or its early 2011 high. Ford has guided to a $0.50 loss in Europe this year, which is a hefty chunk of their 2013 consensus estimate of $1.40 per share, or roughly 1/3rd of Ford’s full 2013 earnings is Europe’s expected loss. Even if Europe just breaks even, Ford could trade to $20 or roughly 10(x) the $2.00 per share estimate. The stock seems to be getting a lift from US truck sales and the record sales of the F-150, but I do think better news out of Europe is the next catalyst. The stock even looks a tad overvalued at current prices, so we would like to see news that boosts forward EPS and revenue estimates. (Long F, may add more)
Amgen: AMGN’s acquisition of ONYX late Friday is expected to be accretive to AMGN’s EPS beginning in 2014, which should be a plus for the stock. We would be a buyer of AMGN in the low $90’s if for whatever reason the market treats the stock badly on Monday morning. It looks like ONYX is rejecting the bid, and putting itself up for bid. A bidding war wouldn’t help AMGN. (Long AMGN)
IBM’s technicals look shaky: Here is our IBM article written for SeekingAlpha that posted over the weekend. The stock is in a technically precarious position. Accenture and Oracle, two companies that are thought to be good leading indicators for IBM’s software and consulting business, had shaky quarters when both companies reported in the last few weeks. I’m nervous about the stock. IBM’s weighting in client accounts was cut in half after the alst earnings report. Big Blue doesn’t report for a few weeks. I may sell the entire position. (Long IBM)
International vs. Domestic Performance: Bespoke tracks an interesting dynamic within the Russell 1,000 i.e. stock performance of companies with all US-based revenues vs. those companies with 50% of their revenues being non-US based. In late April ’13, the outperformance of Domestic vs Int’l was a whopping 600 basis points. As of last week, the outperformance, although still favoring Domestic’s, had narrowed to 310 basis points (bp’s). The US outperformance is the reason we chilled our outlook on the department store sector in mid-May, 2013. Technology is a predominantly International sector. It fits with our “return to global growth” theme, but it will require patience, as IBM proves. (Long more International than Domestic, within SP 500 holdings.) One final interesting point: removing Utilities after their latest crushing thanks to the sharp rise in Treasury yields, the “Domestic Ex-Utilities” basket is beating International by 500 bp’s. All of this per Bespoke.
I’m sure we’ve omitted so much, but thank you for reading and stopping by:
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager