SP 500: Market Cap vs Earnings Weight – Why I Remain Relatively Upbeat on SP 500 Prospects

FC – marketcapvsearningswt

There are a couple of good reasons to be bearish on the Sp 500 right now:

1.) Google and Apple account for $1.2 trillion of the approximate $19 – $20 trillion of the total SP 500 market capitalization, which brings back shades of 1999, in terms of market cap concentration in the SP 500.

2.) The SP 500 keeps re-testing its 200-day moving average, but we haven’t yet had a clean break out to the upside, above the SP 500 late May ’15 high of 2,134.58.

3.) As this blog has detailed repeatedly, despite the mainstream media talking constantly about negative SP 500 earnings, if the Energy sector were excluded, Q1 ’15 earnings grew 11.6% (!) and note Energy’s market cap weight today in the SP 500. In other words, the mainstream financial media keeps throwing up SP 500 earnings as a worry, but if you dig into the numbers, that isn’t the case.

Although this year could see muted returns – between 1% and 10% for calendar 2015 – the above spreadsheet explains why I think that the prospects for a prolonged bear market ala 2000 – 2009, are really remote.

What is important from the above numbers, courtesy of Thomson Reuters and Greg Harrison, is that Financials and Technology, the two sectors that led the bull market from August, 1982 to March, 2000, experienced their bear markets from 2000 and 2009, and now these sectors are pretty reasonably valued, with good valuations, nice dividends, and more importantly, limited downside.

Would a reader of this blog think that after Dodd-Frank, FSOC, capital controls, CCAR, and the rest, not to mention consumer balance sheets being as clean and healthy as anytime in the last 30 years, that there is a “2008-type Financial Crisis” just around the corner ? More importantly, how much downside would you think Technology and Financial’s would have after the horrific bear markets of 2001 – 2002 (Technology), and 2008 (Financials) ?

As the numbers detail, with these two sectors representing 35% – 40% of both earnings weight and market cap for the SP 500, a prolonged bear market, seems quite improbable.

Corrections can happen at any time: note 2010 and 2011, but I think that the prospects of even 2 consecutive years of negative 10% returns, seem pretty remote today.

However, as a wise man once said, “never say never”, particularly in investing.

Value vs Growth: Growth winning big this year: 

Here are some interesting metrics:

SP 500 Growth YTD return: +6.34%

SP 400 Growth YTD return: +7.72%

SP 600 Growth YTD return: ++8.8%

SP 500 Value YTD return: +0.21%

SP 400 Value YTD return: +0.05%

SP 600 Value YTD Return: -0.59%

For those that might be nervous about 2015 returns even though the SP 500 is up just 3.38% YTD, don’t forget to allocate some of the portfolio to the “value” style of investing.

The best performing sector YTD is Health Care (XLV, at +12.56%), and the worst are both Utilities (XLU at -8.20%) and Energy (XLE, at -8.49%).

Data source: Bespoke: 7/17/2015

The other major reason I see less reason to worry today, is the continued low AAII numbers for bulls. Individual investors continue to remain leery of the stock market.

That is typically a good sign.

 

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