June 21, ’14: SP 500 Earnings Update: Forward Growth Rate Hits Highest Level Since January, 2012

Per ThomsonReuters, the SP 500 “forward 4-quarter” estimate rose this past week to $123.04, from last week’s $122.96.

Using Friday’s close on the SP 500 of 1,962.87, the p.e ratio using the forward estimate is now 15.9(x).

The PEG is now 1.86(x), still well below the range of 2013’s 1.88(x) to 3.50(x).

The earnings yield on the SP 500 is 6.27%.

The year-over-year growth rate of the forward estimate is now 8.60%, once again at a new multi-year high, after dipping slightly last week. The forward growth rate hasn’t been this high since January 13, 2012 when it was 9.4%.

Analysis / commentary: If you’ve scrutinized SP 500 earnings as long as we have, the action in the SP 500 understandable this year, just looking at the revisions and forward estimates around SP 500 earnings. The fact is, despite the negativity, SP 500 earnings are growing at mid to high single digits, and starting to improve.

For all practical purposes, with the SP 500 at 16(x) forward earnings, and with it becoming increasingly likely that SP 500 earnings growth could hit 10% (easily) this year, p.e expansion to 20(x) that forward estimate wouldn’t be a stretch.

John Butters of Factset and now Gregg Harrison of ThomsonReuters have started to write about the lack of downward pressure on the q2 ’14 expected earnings growth rate of 6.6%. That same q2 ’14 estimated growth rate was +8.5% on April 1, 2014. Writing about the 10-year Treasury here, we referenced Factset’s comments about the lack of pressure on q2 ’14 estimates in this June 4, 2014, blog post. (By the way, the new level we are watching on the 10-year Treasury is 2.66% in terms of the high end of the range.)

My own comment today is that the lack of downward pressure isn’t just for q2 ’14: all of 2014’s expected sector growth rates are holding up nicely.

Here is the chronology for the expected SP 500 earnings growth rate for 2014 since January 1, 2014:

Jan 1 ’14: +10.8%

Apr 1, ’14: +8.7%

Jun 20 ’14: +9.1%

If there is one key metric to watch each, watch that y/y growth rate of the forward estimate. As that metric improves or starts to grow week-to-week, it means that the SP 500 forward 4-quarter estimate is starting to be revised higher at a faster rate. Basically this forward growth rate is a metric to track the “rate of change” of the consensus forward 4-quarter SP 500 earnings estimate by ThomsonReuters.

Bespoke had an interesting research piece this week (as they typically do): with the SP 500 being up about 6% YTD, given the market’s action, similar historical periods have typically seen an additional 7% “run” from here through year-end.

Given how the quarterly earnings growth patterns are shaping up, I’m expecting a very strong q4 ’14 for both the SP 500 index, and for SP 500 earnings.

We’ve also been playing for a 5% – 7% correction before the 4th quarter, and so far have clearly been wrong.

We’ll have more in a Weekend Linkfest later today or Sunday, June 22nd.

Thanks for reading and stopping by. There are a lot of blogs competing for your eyeballs. Hopefully you’ve found something worthwhile and practical for your investing outlook in this blog.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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