As we talked about last week, the “forward 4-quarter” estimate for the SP 500 reached a new record high this week of $116.67.
The p.e ratio on the forward estimate is 13.99(x).
The “earnings yield” on the SP 500 is now 7.15%, which has been climbing. Still indicates stocks are very cheap.
The year-over-year growth of the forward 4-quarter estimate slipped a little from last week’s 5.21% to this week’s 4.91%. I would like to see that move back towards 6% before long.
To be frank about the “forward estimate”, given that we did not see as much slippage between early April and late June, I thought the forward estimate as we moved into July ’13, would be up above $117 range.
That being said, the forward estimate of $116.67 is at a new record high, while the SP 500 sits below its old high of 1,687.18 of May 22nd, 2013.
Something will have to give between the two, and the last few years, it means the SP 500 will likely trade to a new record high in the next few months.
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SP 500 2nd quarter, 2013 earnings expectations:
2nd, quarter, 2013, earnings start this coming week with Alcoa (AA) on Monday night, July 8th, while JP Morgan (JPM) and Wells Fargo (WFC) both report before the bell on Friday, July 12th.
Here is our Alcoa earnings preview, as well as our JP Morgan earnings preview.
Per ThomsonReuters, current analyst consensus is looking for +2.9% year-over-year growth in the SP 500 as a whole, with expected revenue growth of 1.6%.
By mid-August, when the majority of the SP 500 will have reported their 2nd quarter’s, we expect SP 500 earnings growth to be between 5% – 7%, typical of the last two quarters.
For full-year 2013, current analyst consensus is looking for 7.3% SP 500 earnings growth for the full year as of July 5th.
Here is the current earnings and revenue growth EXPECTATIONS by sector for the SP 500 for Q2 ’13:
Cons Disc: +6%, +5.7%
Cons Spls: +2.9%, +2.3%
Energy: + 1.2%, -7.1%
Fincl’s: +17.5%, +5%
Hlth Care: +0.2%, +4%
Indust: -2.6%, +1.1%
Materials: -7.2%, 0.8%
Tech: -3.7%, +1.9%
Telco: +18.7%, +1.7%
Ute’s: -6.9%, +6.4%
SP 500 +2.9%, +1.6%
* Source: ThomsonReuters “This Week in Earnings”
Conclusions: Financials continue to be one of our sector overweights, with Financials showing some of the best absolute and relative earnings growth within the SP 500, for both the 2nd quarter, 2013 and full year 2013. It will be interesting to hear on the conference calls the impact of higher rates on the Financial sector in general, but we do NOT think that higher rates will have the negative impact (or correlelation) that we saw in the 1980’s and 1990’s. In fact higher rates could very much be a positive for Financials, and not just from a “net interest margin” perspective. Loan growth, credit growth, and capital markets growth (both credit and equity underwriting), will help drive revenue growth as the sector heals itself. (Our largest single-stock positions within Financials are CME, GS, and JPM, as well as Schwab (SCHW). Long all 4.)
The Financial sector’s revenue growth of 5% is also better than prior quarter’s expectations. Off the 2009 market low, given Dodd-Frank and the anti-proprietary-trading, and anti-wealth and “the banker as she-devil” environment that has permeated Washington and the general public, Financials have had a tough time generating revenue growth. The sector saw just 1% – 2% year-over-year revenue growth from late 2009 through the present. I do think revenue growth will continue to improve. Certainly housing and mortgage lending should contribute, although with the interest-rate rise, refinancings will start to dry-up.
Full-year 2013 earnings growth expectations for Financials are currently +18%, and have moved steadily higher over the last 5 quarters.
5% expected revenue growth for Finnacials for q2 ’13 is pretty decent, relative to the SP 500’s 1.6%.
Telecom: note the earnings growth. We aren’t long any Telco but continue to model and track Verizon and AT&T. The telecom sector was part and parcel to the dividend trade and “bond proxy” trade, which is why the stocks have gotten hammered. We are going to give them more time. We like Verizon near $45 and AT&T closer to $30.
Finally, what was interesting about the SP 500’s reaction on Friday to 2.72% 10-year Treasury yield, was that after correcting following the strong market open, the SP 500 gained strength all day and finished the day near the highs of the day. That is a good sign, despite a sharp rise in interest rates.
The SP 500 wants to go higher – that is undeniable. Some think we are on track for a 25% year ala, 1995.
I’ll take it, as will clients.
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Basic Materials: interesting action in US Steel (X) this week. The sentiment around the group, of which we are long Alcoa (AA), US Steel (X) and Freeport (FCX) is absolutely horrid, which I personally believe is a function of the drop in gold. The cacophony and commentary around gold and the GLD is just amazing. I look at it as just another precious metal. The sentiment could be getting too negative around the sector, which is just 3% of the SP 500 as it is. Earnings estimates have been taken out and shot for the sector. We are keeping a toe in the water within the sector, given the negative sentiment. To play a turnaround like Basic Materials requires a lot of patience. We are hoping for some reason to continueb to hold the shares as we see individual earnings reports.
Interest rates: we think 2.90% – 3% is the near-term high for the 10-year Treasury yield. We are still long the TBF, in fact it is one of our largest positions, but to be honest, we’ve been trading the TBF since March – April, 2010, and were finally right on the Inverse Treasury ETF (TBF), this year. We took a beating on the position in client bond and balanced accounts in 2010 and 2011, losing as much as 20%, but making it up with a credit and high-yield overweight. What is puzzling to me is the weakness in high-yield as payroll growth improves and corporate earnings improve. I wonder if it is just mass retail dumping of anything fixed-income or bond-related.
High-yield ETF’s: the HYG and the JNK were down 1.8% and 1.6% respectively this past week, even with Friday’s strong jobs number. Anything fixed-income related is getting trashed. Remember, the old investing adage, “price determines value”, and the selloff in bond land is creating longer-term values. I would think there is wholesale dumping of mutual funds, given their lack of defined maturity. Frankly I’d rather use closed-end funds and ETF’s as well as individual bonds in the next few years, to manage interest-rate risk, than expose clients to open-ended, undefined interest rate risk in a mutual fund.
Thanks to www.investing.com, not just for carrying our blog work, but selecting one of our blog posts for the Editor’s Pick in June, ’13. Here is the blog post that made Investing.com’s Editor’s Pick.
Ryan Detrick, a Cincinnati pal and an XU alum, is simply one of the best Tweeters (@Ryandetrick), bloggers, and market prognosticators in the markets today. Here is the latest from him last week. You absolutely need to follow this guy. So proud that he is a Xavier graduate. Ryan is all over CNBC, Bloomberg, etc. with his forecasts.
Another interesting post from Norm Conley (@JAG_Norm) about the spike in the 10-year Treasury yields. As of June 28th (the date of the post), the 10-year had moved 3 standard deviations above its 20-day moving average. This was prior to Friday’s move as well. I now wonder if the rate move is getting overdone.
From the St. Louis Fed’s website: consumer loans, which bodes well for bank earnings. My own opinion is that with consumer balance sheets vastly improved, loan growth will continue, and likely at a more prudent pace then from 2000 to 2007.
John Butters from FactSet has a good take on q2 ’13 earnings. I have talked to John a few times via email, when he was with ThomsonReuters. When you listen to the video, I do think he is too negative on the SP 500 earnings picture as a whole. This sentiment has enveloped earnings season for the last year now, only to be proved incorrect. Good comments on technology’s earnings, vis-a-vis Apple’s earnings trends. (long AAPL). Also I am not certain of the difference between Factset’s expectation for q2 ’13 SP 500 earnings growth of just 0.3% and ThomsonReuter’s +2.9%. That deserves more attention.
Jeff Miller, of A Dash of Insight is always a good read. There is an interesting link to an article by Vince Foster of Minyanville in Jeff’s June 26th article or post. Vince talks about the Eurodollar market. That is a big volume driver behind CME’s stock price of late. @GarySMorrow is a former CME trader and told me that Euro volume exploded after Bernanke’s speech. The CME also has 99% market share of the Treasury futures market. They are winning both ways with the interest rate spike, as we talked about here and here, last fall and then earlier in 2013. There is one last potential driver for CME volume, and that is the Credit-Default Swap (CDS) market. Jeff Miller and I had lunch this week, and we talked about how most people probably do not understand how moving the CDS market from “over-the-counter” to the exchanges will greatly help mitigate and reduce systemic risk. We’ll have an article forthcoming shortly on this topic. It is a big deal. Read the February 4th, Seeking Alpha story for a better take on the issue.
Great sale of our homebuilder stocks here. Wish I could do that every time. Dan Fitzpatrick over on www.stockmarketmentor.com talks about the ugly charts in homebuilders this weekend. We’ve done a far better job trimming winners this year, as well as managing interest rate risk and mitigating portfolio risk, with the exception of Apple in January and April, ’13. There is always one that shoots you in the foot.
We still like Facebook (FB), although the stock needs to trade over $25, although we’ve been early and wrong. Here is an article found on Stephanie Link’s Twitter feed this weekend, written by David Sterman of Street Authority. David is pretty sharp – he was bulling Ford (F) for a turnaround when it was trading near $2 in early ’09. (Long FB and F.) We’ll be out with a Facebook preview closer to their earnings report.
Thanks to Jeff Miller, Gary Morrow, Jon Najarian, Jim Cramer, Todd Harrison of Minyanville, Eddy Elfenbein (who favorited some of our work this week), Investing.com, forexpros.com, Colin Temple, Josh Brown, Ryan Detrick, the Xavier Finance Department Faculty, and many others who have reached out and either used some of our stuff in their Tweets or blogs, or gave a note of encouragement, etc. etc. (You are never as smart or stupid as the market leads you to believe you are, says Vitaliy Katsenelson). I’m feeling a bit smarter these days, but only a little.)
Sorry for they typo’s. Have to figure out if WordPress has a spell-checker. I write this blog weekly in about 3 hours. Typo’s are just killing me.
Thanks for reading and stopping by:
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager