3.15.14: SP 500 Earnings Update:

Per Thomson Reuters, the “forward 4-quarter” earnings estimate for the SP 500 actually rose $0.02 last week from $118.87 to $118.89.

The p.e ratio on the forward estimate is now 15.5(x), while the PEG ratio is 2.50(x), still towards the upper end of the 14 month range.

The earnings yield on the SP 500 is 6.46%, up from last week’s 6.33%.

More importantly, the year-over-year growth rate of the 4-quarter estimate rose to 6.19%, from 6.11% last week and 6.05% two weeks ago. In my opinion it needs to move over 8% to start to think we can see 10% growth in 2014.

Analysis / Conclusion: no question, every week, when I look at Thomson Reuter’s and Factset’s SP 500 earnings data, it leaves me optimistic and bullish about the market’s prospects. q4 ’13 SP 500 earnings grew 9.8%, just a tad shy of the 10% goal we thought it could grow coming into q4 ’13. However, q1 ’14 earnings growth estimates are now looking for 1% – 2%, average the two quarters and you have about where we have been the last two years i.e. around 5% – 7% y/y growth per quarter.

Full-year 2013 SP 500 earnings growth are expected to come in at +6.2% with a little more than two weeks left in the quarter. That includes the JPM litigation charge taken by the bank in q3 ’13, so I’d expect that the actual operating EPS for the SP 500 is closer to 7% – 7.5% growth. With a market p.e currently at 15.5(x) forward earnings, and growing 7% – 8%, the p.e looks pretty fair.

For full-year 2014, the SP 500 is currently expected to grow earnings at +8.7%, down from 10.8% on January 1, 2014. So far the pattern of erosion in the estimate is normal. My own opinion is that we are still likely to see 10% operating EPS growth for the SP 500 in 2014.

The three time frames within which we evaluate SP 500 earnings:

  1. The quarter being reported, i.e. q4 ’13, is very robust. Hard to argue with +9.8% y/y earnings growth;
  2. The quarter within which we currently reside, which starts getting reported early April ’14. Current consensus estimate of +2%, will likely decline over the next 3 weeks, and then by mid-May, once the majority of companies report, we will likely end up between 4% – 5%, maybe better;
  3. Full-year ’14, which like q1 ’14 has been impacted by weather. I think the 2nd half of ’14 will be stronger than the first half of ’14;

We are still optimistic about the year in terms of expected SP 500 returns. The earnings data hasn’t changed that one bit.

Oracle (ORCLE), Fed-Ex (FDX), Nike (NKE), Lennar (LEN) and Tiffany (TIF) all report this week. What a great cross section of the economy we see this week, i.e. enterprise software, transportation, homebuilding, and two higher-end retailers, with great brands.

Commodities continue to lead the market, with the exception of copper. Strange that commodities and Treasuries are outperforming, very similar to 2010, 2011. Strange correlations, the complete opposite of 1980’s and 1990’s.

Thanks for reading. More to come this weekend.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager





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