8.24.13: SP 500 Earnings Update: Forward Growth Rate Increases Once Again

The forward 4-quarter EPS estimate for the SP 500 fell $0.03 this week to $115.86, from last week’s $115.89.

The p.e ratio on the forward estimate is 14.3(x), which is closer to the high-end of the p.e range for the SP 500 over the last year. Using the forward estimate, over the last 18 months, the SP 500’s forward p.e ratio has ranged from 12(x) to almost 15(x) earnings for what has been slow and steady mid-single-digit growth for SP 500 earnings, both in 2012, and what is estimated for 2013 and 2014.

The earnings yield on the SP 500 forward estimate is 6.96%.

The growth rate in the forward estimate rose again to 7.28%, versus last week’s 7.24% and July 5th’s 5.16%.

With 485 companies reporting their 2nd quarter, 2013 results, actual year-over-year (y/y) earnings and revenue growth for the SP 500 was +4.8% and +2.1%.

The biggest Q2 ’13 upside surprise in terms of sector expectations was Financials, which is showing +30% y/y growth when 17.5% was projected in July 1. Also showing healthy upside surprises were Consumer Discretionary, at +9.1% actual growth versus the +5.9% expected on July 1, and HealthCare at +4.7% when 0% growth was expected July 1, ’13.

Energy and Basic Materials are the two sectors that disappointed in terms of q2 ’13 , and despite the headlines, it was Energy that was far worse than  Basic Mat: On July 1, consensus expectations were expecting +1.3% earnings growth for the Energy sector, while actual growth is -8.3%. For Basic Materials, on July 1, expectations were for a -6.7% decline, while the actual results show a -8.3% y/y drop in q2 ’13 earnings, with the point being that I suspect Basic Materials as a sector was already discounting horrid news by the time companies reported. This may be one reason that Basic Mat stocks have been flatlining since late June – early July, despite horrid earnings and guidance.

Personally, in terms of the SP 500 as a whole, I thought Q2 ’13 would wind up close to +6% y/y growth, better than today’s 4.8%.

In terms of the horrid retail numbers the last two weeks, and what that could portend for the economy and SP 500 earnings, note that since August 1, or the start of retail reporting season (usually February, May, August and November is when retailers report their results) the actual forward estimate for the SP 500 has fallen from $115.96 on August 2nd, to $115.86 as of August 23rd, or a whopping $0.10 slippage. (Yes, one thin dime…)

For full-year 2013 and 2014, SP 500 earnings are still expected to grow 6.5% and 11.3% respectively.


Ryan Detrick of Schaeffer’s Investment Research out of Cincinnati, notes how the rising fear in this market is actually a positive. I agree – even shallow pullbacks in the SP 500 have been met with sharp increases in bearishness, which usually implies the market finds a bottom rather quickly.

Our August 8th blog post on Microsoft now looks pretty prescient. We mentioned on that date, Ballmer should probably depart. Heard this week that ValueAct getting a Board seat may have been the definitive strike against Ballmer. I continue to think the stock is worth at least $40 per share, but a lot will now depend on any ASR (accelerated share repurchase) if any, and the size of the next dividend and share repo plan. Announcing Steve’s pending retirement may have been the proverbial sacrificial lamb to the wolves, and allow the MSFT Board, not to make any sudden decisions on their huge cash position. Here was our Thursday morning August 22nd, SeekingAlpha article on MSFT that preceeded the Ballmer announcement by a day. Better to be born lucky than smart.

Probably a better question is “Who (which CEO) might be next to fall thanks to horrid stock price performance ?” It might be a stretch, but I still think GE CEO Jeff Immelt’s days are now numbered. The stock continues to be a dog. GE is still trading more than 50% below its mid-September, 2000 high of $60.75. At some point management has to stop blaming GE Capital. Here was our July ’13 earnings preview on GE, where we looked at GE from a longer-term perspective. Although it is seeming sacrilege to say that I don’t think that Jack Welch was nearly as good a CEO as GE’s stock price performed from 1982 to 2000, and I don’t think Jeff Immelt is as bad as GE’s stock performance from $60 down to $23, the fact is GE as a company and stock price need a catalyst. My own opinion is that GE is worth at least $30 per share, and with new blood and a potential GE Capital spin-off, probably a lot more, given how Diversified Industrial’s like United Technologies (UTX), and Honeywell (HON) are trading. (Long GE, UTX)

Here is an off-the-wall comment that could be ridiculed greatly: The growing acceptance of the electric / hybrid car, could decimate oil demand in coming years, given that so much of the demand for oil comes from demand for gasoline. I thought I read that 50% of crude oil demand is for gasoline refining. At just 1/2 of 1% of cars on the road today being hybrids/electrics, that will only grow and as Tesla (TSLA) is proving, consumer demand will drive improvement in recharging stations and battery life. In my opinion the electric car today is like the PC in the late 1970’s: a truly disruptive technology waiting for the right moment. Electric’s / hybrids will get cheaper, and become more mainstream, hopefully in my lifetime.

CNBC graphic this week:

Top Performing Sectors the past 15 years:

1.) Energy (can’t recall exact return, but over 200%);

2.) Consumer Discretionary;

3.) Basic Materials;

If Financials and Technology led during the 1980’s and 1990’s and commodities like crude oil, Energy, and Basic Materials have lead the market since 2000, does this mean that we will now see a secular return to Financials / Tech as SP 500 leadership the next 10 – 15 years ?

Inquiring minds want to know…

Good article on Municipal Closed-End Bond Fund discounts tweeted by Bob Brinker. Here is our August 6th blog post saying the same thing.

We sold our Nikkei ETF’s this week, the EWJ, and the DXJ, after a 6% loss. Think I was too early in cutting them loose, i.e. seller’s remorse.

Next week’s pre-Labor Day trading should be light, so we are going to cut the blog short tonight.

Thanks for reading and remember, in our opinion, stocks over bonds for a few more years.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager




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