9.13.14: SP 500 Weekly Earnings Update – Bonds and the Dollar Take Center Stage


Per ThomsonReuter’s “This Week in Earnings”, the forward 4-quarter estimate fell to $125.80 from last week’s $126.34, or a decline of $0.48 on the week.

The p.e ratio on the forward estimate as of Friday’s close is 15.78(x) and the PEG ratio is now 1.73(x), still relatively attractive.

The earnings yield (some think this is a proxy for the equity risk premium) rose to 6.34% last week, from 6.29%.

The year-over-year growth rate on the forward estimate fell to 9.13% from last week’s 9.15%. This is the 7th straight weekly drop for the forward estimate growth rate.

The high of 9.58% from 8/1/14 to the low of 9.13% this week, is a 45 bp change in growth or roughly a 4.7% decline in the forward growth rate since August 1.

Analysis / commentary: Since the late July ’14 high of 1991 for the SP 500 on July 24th, to the SP 500 close of 1985 on Friday, the SP 500 has moved a whopping total of 6 points in roughly 6 – 7 weeks. We are in the proverbial dead zone for earnings releases from now until early October ’14 although Fed-EX (FDX), Lennar (LEN) and Oracle (ORCL) report this coming week, which is a good cross section of Industrial’s / Transports, Homebuilding (Consumer Discretionary), and Enterprise Technology Software, while Nike (NKE), Micron (MU) and even Costco (COST) should follow before early October ’14. (Long FDX, LEN, ORCL, NKE, MU, COST in varying weights.)

Here is the progression in q3 ’14 SP 500 earnings over the last 3 weeks:

9/12/14: +6.5%

9/5/14: +6.7%

8/29/14: +8.3%

As analysts talked to management’s and evaluated their earnings model’s at the end of August, it resulted in a reduction in q3 ’14 earnings growth.

However, this is still pretty much “normal” in terms of the degree of reduction into a quarter’s earnings releases.

Taking a more panoramic view, here is the change (as of Friday, September 12th, ’14) in full-year 2014 SP 500 earnings growth estimates by sector, since July 1 ’14:

Consumer Disc: +7%, +8.6%

Cons Staples: +4.9%, +5.9%

Energy: +7.4%, +9.4%

Financials: +3.2%, +6.6%

Hlth Care: +15.2%, +11.95% (big upward revisions to estimates since July 1, thanks mainly to biotech)

Industrials: +9.3%, +8.8% (despite the dollar strength, hasn’t hurt Industrials – upward revisions since July 1 – very surprising)

Materials: +8.3%, +8.6% (another sector, slight downward bias, but mainstream media telling me Materials supposed to be hammered by dollar strength)

Technology: +10.4%, +10.6%

Telco: +14.9%, +15.9%

Utilities: +7.5%, +7%

SP 500: +8.2%, +9.0%

This data analysis incorporates essentially the last three weeks of September and then q4 ’14 so we are expecting decent earnings numbers for q4 ’14 when the reports start coming in early January ’15.

Here is the issue I have with all the budding commentary on the strength of the US dollar the last few months and what it could do to SP 500 earnings: if you buying the stock of a company, that is a 3% – 5% secular grower, like the Consumer Staples, with a large percentage of revenues outside the US, then the 3rd and 4th quarter of 2014 could be impacted by US dollar strength, but the impact is “translational” right now. If you are buying the stock of a company that is growing 15% – 20% and a lot of it is overseas, the dollar strength will impact the numbers, but it is very unlikely to impact the growth rate OVER THE FORESEEABLE future.

Understand the difference between the “translational” impact of the US dollar and the “economic” impact. The economic impact of the dollar strength is like grey hair: it starts slowly and its impact is barely noticeable until after a considerable time, you are fully grey.

A strong dollar benefits importers and penalizes exporters, all other elements being equal. I wish I could access the data, but I would guess that, after 2008, and the growth of BRIC’s and such in the last decade, of total US GDP, the US is a larger “net exporter” than say in the late 1990’s when the Asian Tigers collapsed, so prolonged strength in the dollar could have a net-net negative impact on SP 500 earnings over time, if the strength in the dollar is persistent.

The point of the Weekly Earnings Update this week is that, the mainstream media is going to beat the strong US dollar theme into the ground with attention, and some of it will be good and worthwhile. There could be a large shift to stocks with US domestic revenues, which according to Briefing.com, there is about 100 companies in the SP 500 with 100% of their revenues within the continental US.

Interest rates are another issue: the yield on the 10-year Treasury rose 15 basis points this week to 2.61% from 2.46% – that is a big change. 2.65% seems to be the mid-point of the range from the 12/31/13 high of 3.00% and the August 15th low of 2.30%.

A stronger dollar and higher interest rates are two potentially “valuation suppressing” events happening concurrently in the US economy this past week. Through the end of 2014, the SP 500 earnings data looks pretty good. Mainstream media has to sell “fear” to get your attention. We can use this to our advantage in client portfolios. I still like and look for a strong 4th quarter, 2014, rally for the SP 500.

Before q3 ’14 earnings are actually reported in mid-October, expect the SP 500 earnings growth rate to bottom around 5%, still pretty decent relative to the last few years.

So far q4 ’14 SP 500 earnings growth estimates haven’t seen much downward pressure.

We haven’t made many adjustments to clients sector weights all year. Worries about the dollar right now, are more opportunity than actual impact, in my opinion.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager










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