5.10.14: SP 500 Earnings Update: Q1 ’14 Earnings +5.4%, i.e. Stronger Than Expected

Per Thomson Reuter’s, “This Week in Earnings”, the forward 4-quarter estimate this week, slipped a little from last weeks $123.19 , to $123.07 this week.

The p.e ratio on the forward estimate is now 15.3(x), and the PEG ratio has slipped back under 2(x) to 1.82(x) for the second week in a row.

The earnings yield on the SP 500 is 6.55%, same as last week, and for Fed-model aficionados, still indicates the strong relative value of stocks versus bonds.

More importantly, the year-over-year growth rate of the forward estimate rose again last week to 8.36% versus the prior week’s 8.21% and the best y/y growth since late 2013.

q1 ’14 earnings are expected to reach their unofficial end this week, with Wal-Mart’s (WMT) Thursday morning pre-open earnings release, and so far, per Thomson Reuters, the y/y earnings growth for the SP 500 is +5.4%, far stronger than the 2.1% expected on April 1 ’14, after the brutal Midwest and East Coast winter.

My own guesstimate was for +3% – 5% prior to the start of earnings season, but, unless WMT lays an egg, and that is highly doubtful, q1 ’14 earnings will likely be up 5% – 6% before the quarter is done.

q2 ’14 earnings are still expected to increase +7.5%, which is down slightly from April 1’s expectation of +8.5%. While we are likely to see further negative revisions as we move through June and the first part of July ’14, just from writing this blog every week for the past 2 years, I can tell that q2 ’14 earnings, as they look right now, will likely be pretty healthy.

As we’ve written here and here the past two weeks, Technology and Healthcare are two sectors that are showing the best relative earnings growth since Jan 1, ’14:

Here is the progression of Technology and Health Care earnings for q1 ’14 as of May 9th, April 1, 2014, and Jan 1, 2014:

Technology: +9.3%, +2.5%, +7%;

Health Care: +11.9%, +3.7%, +5.8%;

The reader can quickly see how, as of April 1,2 2014, the consensus estimates had grossly underestimated growth for the two sectors, with large upside surprises coming from Apple (AAPL) and Gilead (GILD). (Long AAPL, no GILD)

Analysis / Conclusion: When we came into 2014, I originally thought that Sp 500 earnings could grow 10% in 2014, and with just modest p.e expansion, from 15(x) to 18(x) earnings, the SP 500 could be up another 15% – 20% on the calendar year in terms of return. We are flip-flopping (to put it mildly) on this expectation, but after seeing the q1 ’14 revisions and the expectations for q2 ’14 remain relatively stable, the last two – three weeks, I am back to thinking we could see +10% on the SP 500 earnings growth this calendar year, given the economic data, particularly job growth. The degree of p.e expansion we would see on that 10% earnings growth remains a mystery (as it always does).

In calendar 2013, the SP 500 grew earnings 7% y/y, and yet the SP 500 increased 32% y/y. Id say that is a good example of p.e expansion.

This year, the market’s flat return could be a function of allowing earnings growth to catch up to the index appreciation.

What ever is happening to the SP 500 and growth stocks this year, it isn’t really earnings related. I’m growing ever more confident of 10% earnings growth for 2014.

Thanks for reading and looking in. There are a lot of financial and market-related blogs competing for your eyeballs. We appreciate readers spending time on our little corner of the world.

Trinity Asset Management, Inc.

Brian Gilmartin, CFA

Portfolio manager








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