10.5.13 SP 500 Earnings Update: Record High SP 500 Dollar Estimate, But Forward Growth Rate Slows

Per ThomsonReuters, the “forward 4-quarter” EPS estimate for the SP 500 jumped to $119.04 this week, from last weeks $115.46, which represents a new all-time high for the forward earnings estimate for the key benchmark.

The only problem I see is that the forward growth rate of that forward estimate fell to 6.04% from last weeks 7.02%. It bears watching.

Here are the numbers as they fall out presently:

Forward 4-quarter estimate: $119.04

P.e ratio on forward estimate: 14.2(x)

Earnings yield: 7.04%

Growth rate of forward estimate: 6.06%

More importantly, here is the trend over the last 5 weeks in terms of the forward estimate:

10/4/13: 6.04%

9/27/13: 7.02%

9/20/13: 7.30%

9/13/13: 7.30%

9/6/13: 7.10%

We have not seen a 100 basis point change in the forward rate since mid-July ’13, when the same rate jumped from 4.41% to 6.56% or over 2% in one week’s time.

Q3 ’13 is actually lapping the weakest quarter for SP 500 earnings off the 2008 – 2009 Great Recession, when in Q3 ’12, SP 500 earnings grew just 2%, after starting the quarter with expectations of a 2% decline in earnings.

Q3 ’13 Expected Earnings and Revenue Growth by Sector:

Per ThomsonReuters, the SP 500 as a whole is expected to grow earnings 4.5% for q3 ’13, on 3% revenue growth, which is actually a little better than Q2 ’13’s 2.2%.

I expect q3 ’13’s actual earnings growth to be closer to 7% when we get through mid-November ’13’s company reporting, at which point about 400 of the 500 SP 500 companies will have reported.

Here is a quick rundown of earnings and revenue growth by sector as of 10/4/13:

Cons Disc: +7.3% and +6%

Cons Spls: +4.9% and +2.7%

Energy: -1.6% and -1.7%

Fincls: +9.5% and +1.5%

Hlthcare: +3.6% and +6%

Industrials: +5.4% +2.5%

Materials: -0.8% and +2.1%

Technology: +3.3% and +4%

Telco: +7.3% and +2.7%

Ute’s: +0.6% and +7.3%

SP 500: +4.5% and +3%


Ranked by sector earnings growth from highest to lowest (est’s for q3 ’13):

Fincls: +9.5% (no surprise here – Financials have had the strongest sector earnings growth all year, although q3 ’13 is the lowest rate of growth for Financials of the 4 quarters of 2013);

Cons Disc: +7.3% (Consumer Discretionary has been one of the top performing sectors all year in terms of YTD return);

Telco: +7.3% (Ignore telco, only 6 co’s left in sector, and Sprint removed from index after July 1. SP should simply roll telco into Technology and be done with it);

Industrials: +5.4% (If Industrials do 5.5% y/y earnings growth, best quarterly earnings growth for the sector since q2 ’12);

Cons Spls: +4.9% (Staples have been trashed – pretty oversold group. Per Bespoke, ironically, since 1980, when measuring total returns by sector for just the 4th quarter, Staples have been best performing sector);

SP 500: +4.5%

HealthCare: +3.6% (weighed down by large-cap Pharma, biotech has been monstrous in terms of performance. H/Care 2nd best performing sector YTD as of 9/30/13);

Technology: +3.3% (negative earnings growth for first two quarters of ’13. If 3.3% hit or better, best growth since q2 ’12);

Utilities: +0.6% (never owned Ute’s in size and wont now as dividend trade has ended and rising rates are double whammy for sector);

Basic Mat: -0.8% (stocks performed well in calendar q3 ’13, given the horrid numbers. Which is telling the truth – the earnings data or the stock price acton ?)

Energy: -1.6% (We have never been good Energy investors. Only long is HAL. Like XOM at $80.);

Ranked by sector revenue growth from highest to lowest (est’s for q3 ’13)

Ute’s +7.3%

Cons Disc: +6%

HlthCare: +6%

Tech: +4%

SP 500 +3.3% (est)

Cons Spls: +2.7%

Telco: +2.7%

Industrials: +2.5%

Basic Mat: +2.1%

Financials: +1.5%

Energy: -1.7%

Earnings Detail Summary /Conclusion: when all is said and done for q3 ’13, mostly by mid-November, ’13, I would expect year-over-year growth for the SP 500 to be closer to 7% – 8% for the quarter (given the +4.5% expected growth coming into q3 ’13, there is an outside chance we could see 8% y/y growth) , and revenue growth right around the current estimate of 3.3%. We are lapping the easiest compare in q3 ’12, off the Great Recession. Financials are all about credit, reserve releases and expense savings as revenue growth for Financials still lags earnings growth markedly, and will likely do so given Washington and the Dodd-Frankenstienian regulatory regime.

Per Bespoke, when ranked by the Standard & Poors SPDR ETF’s, the top performing sectors as of 9/30/13:

Consumer Discretionary: +28.29%

Healthcare: +27.13%

Industrials: +23.17%

Financials: +22.30%

Financials were in the top 3 performing sectors all year until late in the 3rd quarter. I would expect if the SP 500 has its typical 4th quarter, in 2013, that Financials would outperform again. The surprising sector has been Industrials – that sector has really closed the performance gap since the mid point of 2013. Recoveries in Europe, Japan and a little better growth in China have to have helped. Industrials rose 5% alone in Sept ’13.

  • We would like to see the forward 4-quarter growth rate start to accelerate again as we move through October ’13 earnings;
  • We think the SP 500 is on track for another good quarter in Q4 ’13, given its historical performance as the best quarter of the year;
  • Financials performed poorly in Q3 ’13, but should outperform in Q4 ’14, if we get a normal market, although Financials might not be the place to be next year;
  • We do think q4 ’13 earnings could be +10%. Watch the revisions as we move through October ’13 earnings;
  • We like how the stock market sentiment has turned decidely negative again, despite just the 3.5% correction in the SP 500 from peak to current levels, and we think q4 ’13 will see another decent market and equity outperformance. Nothing has really changed (yet) from the first 3 quarters of 2013.
  • Earnings aren’t the problem for this stock market, it is the perception of those earnings that keeps getting distorted;
  • Q3 ’13 earnings growth should wind up +7% – 8%, given that “actual” earnings have come in +3% – +5% higher than the early quarter estimate;
  • If we are wrong, the market will let us know this week;


Alcoa (AA) reports Tuesday night, 10/8/13 after the market close. Stock was down 3% this week. Upside might have to be driven by enhancement of shareholder value, rather than business fundamentals. Still long and very wrong on AA. Under Basic Materials comments above, I do like how Freeport, (FCX), and US Steel (X) are trading. Maybe there are signs of life. Here is our earnings preview on Alcoa. (Long AA, FCX, X)

Micron Technology (MU) reports Thursday night after the closing bell. The stock is approaching a 7-year high and near a long-term technical breakout. Here is our earnings preview. Facebook (FB) was a monster performer in client accounts, up 100% or close to it in q3 ’13. Micron could have a huge calendar q4 ’13, but the fact is there is a lot of bullishness around MU currently, and coming into earnings. Sentiment is exactly the opposite pre-earnings between Facebook near July earnings and MU near October ’13 earnings. (Long FB and MU). The key question remains around MU, “Has the Capacity Cycle Really Changed ?”

Costco (COST), JP Morgan (JPM) and Wells Fargo (WFC) also report this week. We will have a good look September ’13 quarter ends and how the quarter progressed by Friday, October 11. (Long all mentioned.)

Apple (AAPL) needs growth. Here is our earnings preview. I actually think they could have a decent Sept ’13 and Dec ’13 quarter, in terms of “better than expectations”, but worry about what follows. (long AAPL)

Part of our bullishness through q4 ’13 is reading great technicians like Ryan Detrick at Schaeffer’s Investment Research. Here is his chart of Russell 2000 and its similarity to Dow 30, 1995. SP 500  rose 35% in 1995. (Long a little IWM into year-end.)

Norm Conley of JA Glynn: a fabulous chart showing the 2009 market bottom and subsequent rally to other famous market bottoms in 1932, 1942, and 1982.

A second Norm Conley chart – one of the most significant (in my opinion) he has ever posted. I’ve shared this with clients. The SP 500 is not out of the wood yet.

CNBC interview with John Butters of Factset, on q3 ’13 earnings and where he thinks the quarter will fall out. I think John is a little too bearish, but Factset is pushing ThomsonReuters as another voice in the SP 500 earnings arms race.

Summary: The fact that the 10-year Treasury can’t drop further in yield than 2.60 – 2.61% and now looks to be stabilizing, and that despite Washington, the horrid political polarization, the government shutdown, and the hand-wringing therein, the SP 500 can only correct 3.5% from its peak, I do think the 4th quarter of 2013 is setting up for its usual decent rally. That being said, if we are going to fail below 1,270 and then 1,250, it should happen this week. We are still long a little extra duration (interest rate risk) for a trade, but that may change shortly. This stock market wants to go higher, and the sentiment turns ugly quickly.

I’ll say it here today, and sound like an idiot I am oft accused of being, but I do think over the next 1, 3 and 5 years, the SP 500 goes much, much higher.

Thanks for reading and stopping by:

Trinity Asset management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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