With 464 of the SP 500 companies now having reported q1 ’14 earnings, the y/y growth of earnings for the major index is up 5.5%.
Per Thomson Reuter’s This Week in Earnings, the “forward 4-quarter” estimate rose by one thin penny this week to $123.08, from $123.07.
The p.e ratio on the forward estimate as of Friday’s close was 15.25(x).
The PEG ratio remains at the low end of the recent range at 1.86(x).
The SP 500 “earnings yield” is now 6.55%, and the spread between the SP earnings yield and the 10-year Treasury is now over 400 bp’s at 4.04%.
The y/y growth rate of the forward estimate is now 8.38%, up from last week’s 8.36%.
Commentary / Analysis: the last 3 weeks, SP 500 earnings have suddenly strengthened, and even full-year 2014’s expected earnings growth improved from +9.1% last week, to +9.2% this week, which is different than the usual trend of estimate growth reductions through most of the year, and then stabilization and improvement in q4 of each year. For q2 ’14, the sectors that have seen their expected y/y growth rates improve from April 1, ’14 until today, Friday, May 16th, 2014:
Health Care: +8.6% today, versus 6% on April 1 ’14
Industrials: +8.1% today from +7.7% as of April 1 ’14
Telco: +13.4% today, versus 12.4% on April 1 ’14
John Butters at Factset summed it up perfectly in this week’s, Factset Earnings Insight: ” Lowest Cuts to SP 500 Earnings Estimates at the Mid-Point of a Quarter Since q2, 2011″. Here is the average decline in the SP 500 earnings estimate for various time periods (per Factset):
1.) Past year (4 quarters) average decline has been 2.7%
2.) Past 5 years (20 quarters) average decline has been 1.6%;
3.) Quarter 2, 2014 estimate has fallen 1% from March 31, through May 15th, 2014
So what’s the point ? Well, the next three quarters consensus earnings growth for the SP 500 for q1 ’14, q3 ’14 and q4 ’14 as of Friday, May 16th is +7.2%, +11.3% and +11.7%.
There was a plethora of bearish calls this week from Acompora, David Tepper, and various and sundry throughout the financial media. The one aspect to this bull market off the March ’09 market low, is how quickly mainstream financial media “pundits” or experts turn bearish. We are at a bearish tilt once again (in my opinion).
If we do get a decent correction, it is highly unlikely to be caused by a recession or an earnings decline.
Markets can correct sharply and SP 500 can continue to grow at healthy pace, as in 1994, when SP 500 earnings rose 19% and the index rose 1% or in 2011, when SP 500 earnings rose 15% and the index rose 2.5% on the year. However it is unlikely that we get a recession or lengthy bear market, without a drop in SP 500 earnings.
SP 500 earnings have suddenly strengthened the past three weeks. q2 ’14 will likely be another pleasant surprise when earnings start mid-July ’14.
Thanks for reading. We wanted to get this out on Friday night, in time for weekend reading.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager