The most striking aspect to the SP 500 since July 1 is the performance differential between “Growth” and “Value” within the SP 500 and really, within mid-caps and small caps too. The drubbing biotech took this week may start to take some of the starch out of the Russell 2000 Growth index, but that index or ETF (IWO) is still up 9.5% YTD through 7/23/15.
Here is how the style differences are taking shape across all market-caps as of 7/23/15 (Source: Bespoke):
SP 500 Growth: +5.35%
SP 500 Value: -1.09%
SP 400 Growth: +7.05%
SP 400 Value: -1.60%
SP 600 Growth: +7.56%
SP 600 Value: -2.90%
Sp 500: +2.27%
Analysis / conclusion: the style differences noted above are consistent with the stock action after the July ’15 earnings releases the past two weeks. Google, GOOGL), Amazon (AMZN) and Netflix (NFLX) have soundly outperformed what I consider “Value” Technology of Microsoft (MSFT), Apple (AAPL) and IBM (IBM). (Long GOOGL, GOOG, AMZN, MSFT, AAPL, IBM)
There is a persistent difference too between “earnings beat rates” and “revenue beat rates” (actual reported EPS and revenue vs the consensus estimate expected at the time of the release). Per Factset, while Basic Materials (which is heavily Chemicals and commodities) is seeing an upside surprise in EPS beats of 7.3%, using Thomson Reuters revenue data, just 13% of Basic Mat companies have beat on revenues while 87% have missed.
Interestingly, if readers are wondering why Financials have traded so well lately, with 43 of 88 Financials reporting per Thomson, 67% of the Financial companies have beaten on revenue, while just 33% have missed. The point being that even though the SP 500 as a while is seeing below-average revenue beat rates, Financials are showing above-average revenue beat rates for those Financials that have reported thus far.
It should be no surprise to anyone that “revenue” continues to be an issue within the SP 500 for the 2nd consecutive quarter, as the strong dollar and the commodity-based sectors like Energy and Basic Mat continue to weigh on the index.
Per Factset, “Ex- Energy”. SP 500 earnings have grown +4.21%, while revenue would have grown +1.8%.
Even more interesting, per Factset, and is similar to some data found on Bespoke, is that if the SP 500 wad divided between companies with less than 50% from outside the US, and then more than 50% of their revenue from outside the US, the earnings growth differential is quite stunning in my opinion:
* Ex-Energy with revenue of less than 50% outside the US, the blended earnings growth rate for Q2 ’15 is +8.3% (wow!)
* Ex-Energy with revenue greater than 50% from outside US, the earnings growth rate is -0.2%
The question for readers then becomes, do you play the laggards or do you / we chase the US-domiciled stocks and ETF’s ?
Coming into 2015, Tech was (and is) to be the largest overweight for clients, but Financials was the favorite sector coming into 2015 (and the 2nd largest weighting by sector), and after lagging badly in Q1 ’15, the sector has become to catch up to the SP 500’s YTD return. The Regional Bank ETF (KRE) would be one way to play the “US-only” attribution matrix. A trade down to $40 for KRE should be a good area of support for the regional bank ETF.
Expect SP 500 “ex-Energy” Q2 ’15 earnings growth in the area of 5% – 7% at least by mid-August, and probably higher. I’ve been beating this horse for a while – it should be no surprise.
Thomson Reuters Earnings Data by the Numbers:
The forward 4-quarter estimate declined this week to $125.10 from last week’s $125.26.
The P.E ratio on the forward estimate remains stuck at 17(x), actually 16.62(x) per this weeks data.
The PEG ratio is still negative.
The SP 500 earnings yield is back above 6%, to 6.02%
The y/y growth in the forward estimate is STILL negative at -1.42%, down from last week’s 1.16%. That negative y/y growth rate makes me nervous, but in another post I will show readers why I think this is happening.