5.3.14: SP 500 Earnings Update: Positive Earnings Revisions This Week

Per Thomson Reuter’s “This Week in Earnings” the forward 4-quarter estimate for the SP 500 actually increased this week to $123.19, up from last week’s $122.77.

The p.e ratio on the forward estimate is now 15.3(x), and the PEG ratio as of Friday, May 2nd, 2014 is 1.86(x).

The earnings yield on the SP 500 is 6.55%.

Most importantly, the year-over-year (y/y) growth rate is 8.21%, which exceeds the previous highs of 8.02% in late December ’13, and is now the highest y/y growth rate since January, 2012.

Commentary/Analysis: A number of metrics this week show the SP 500 at a valuation that remains quite reasonable, almost attractive if you look at the 1.86(x) PEG (P.E-to-Growth) ratio, and the y/y growth rate in earnings. The 1.86(x) PEG hasn’t been this low (consistently) since the first quarter of 2012, so we need to see if this continues for a few weeks or months.  The increase in the y/y growth rate for the SP 500 is very important, but it also needs to be sustained if the SP 500 should gain traction here.

There was a nice jump in earnings this week. While the pattern of lower revisions, then higher revisions once earnings start, continues, I took a look at the full-year 2014 earnings growth estimates here in this spreadsheet:FCSP500estchg5214

Note the very robust change in the Health Care sector. Note only have the earnings growth estimate revisions been higher in April and through early May, but the full-year 2014 earnings growth estimate for full-year 2014, is now HIGHER than on Jan 1, 2014. That is a very unusual, and out-of-the-ordinary pattern for estimate trends, and bodes positively for the sector.

The other sector is Technology: we wrote about that here last week on this blog, and continue to think the sector is attractive. Our tech sector exposure is split between “old” low-valuation Tech, and some racier, high-valuation Technology, like Facebook. Sure Apple was a huge boost for the sector given AAPL is 3% of the SP 500 and 13% of the QQQ, and the largest position in both indices, but even Twitter (TWTR) saw its forward estimates revised higher after its poorly received earnings report. (Long FB, AAPL, TWTR.)

Healthcare and Technology are roughly 13% and 19% of the SP 500 when weighted by market cap. While the Telco estimate revisions also bode well for the Telco sector, my issue with the sector is that it now consists of just 5 companies, and along with Ute’s and Basic Materials, comprises just 3% of the SP 500 each by market cap weighting.

Our original q1 ’14 earnings growth estimate was for 3% – 5% y/y SP 500 earnings growth when the majority of companies had reported q1 ’14 earnings by mid-June, 2014. We wrote on this blog as late as yesterday here, (using last week’s data) that 2014 full-year earnings growth has been reigned in from an expected 10% originally to 7.5% as of last week. I may have to revise yesterday’s conclusions already. q1 ’14 could come in better than 5% growth, and full-year 2014 earnings revisions, driven by Healthcare and Technology could be very positive for the SP 500 earnings as a whole. (The fact is the SP 500 isn’t seeing any P.E expansion, which is hindering portfolio managers and traders I would think.)

We saw a nice jump in the forward growth rate this week to 8.2%. This is all good. While faster SP 500 earnings growth doesn’t always translate into a strong stock market, like the old analogy about the fastest man winning the foot-race, it sure is a good way to bet.

We’ll be out with more detail on the Healthcare sector and estimate revisions this coming week.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager










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