SP 500 Weekly Earnings Update: Drilling Down into the Forward Estimate Revisions

With the unofficial end of Q2 ’16 earnings season this week, with the Walmart report, investors now look forward to September’s earnings reports since we see companies with an August ’16 fiscal year-end or quarter end. That would be names like Oracle (ORCL), Fed-Ex (FDX), Nike (NKE), etc. as well as Accenture (ACN), Micron Technology (MU), and Walgreens Boots (WBA). (Long all except ACN), all of which report before or around October 1 ’16.

Because of the comments on last week’s SP 500 Earnings Update, from this Seeking Alpha post, showing how Technology estimates were tracking with this article (with and without Apple’s numbers), was necessary (in my opinion) to show readers / investors how market cap can greatly influence SP 500 price action.

Technology is the largest sector within the SP 500 by market cap at 20% of the index.

Thomson Reuters (by the numbers):

  • Forward 4-quarter estimate: $125.82 vs last week’s $125.88.
  • P.E ratio: 17(x)
  • PEG ratio: 12(x) – most bear’s reference the PEG ratio as a reason not to own stocks, and it’s very valid, except that it ignores market cap.
  • SP 500 earnings yield: 5.76% vs last week’s 5.76%. Typically an earnings yield above 6% is where the market has stopped correcting.
  • Year-over-year growth rate of the forward estimate: +1.46% vs last week’s +1.47% and still well below where I thought it would be by this point in 2016.

The single distinguishing characteristic of the forward 4-quarter earnings estimate detailed above is that the negative revisions to the metric are much less severe than in past quarters. What that means is that there seems to be far less downward pressure on forward earnings estimates than in prior quarters.

Here is the data:

Q3 ’16: $125.82 today vs. $127.04 on July 1. The $1.22 difference is a 1% degradation in the forward estimate over the last 6 weeks

Q2 ’16: $123.00 on May 13th vs. $124.78 on April 1. The $1.78 is a 1.5% degradation in the forward estimate over 6 weeks from April 1 through May 13 ’16.

Q1 ’16: $121.90 on February 12 vs.  $126.64 on January 1. The $4.74 degradation in the first six weeks of 2016 was a 3.7% decline or degradation in the forward estimate.

Q4 ’15: $123.86 on November 13, vs. $126.58 on October 1. The $2.72 degradation in the forward estimate was a 2.7% decline from early October ’15.

Factset tells its readers of “Earnings Insight” the percentage decline and gives the averages. Using Thomson’s data, I’ve shown readers the trends and the earnings erosion over the last few quarters so readers can see the trend. Factset to its credit, gives 1, 3 and 5 year averages which is very important although it was noticed on Factset’s Earnings Insight this week that they stopped providing commentary on sector earnings and revenue growth.

One caveat for astute readers: For each quarter cited above, the forward 4-quarter earnings estimate used was after the quarterly bump in the estimate. As we roll into each new quarter, there is typically a $3 – $5 increase in the forward estimate as the back quarter rolls off and the forward quarter is added. The point is that it is very natural to see a decline in the forward estimate as each quarter progresses through earnings, thus measuring the rate of decline of degradation, conveys important information about analyst sentiment towards future quarters.

Readers may consider this too technical, and navel-gazing at its finest, but it’s important to repeat that subtle changes in the SP 500 earnings data, both absolute changes in growth rates and more importantly relative changes between sectors, conveys important information to investors.

Pre-Labor Day and the 4 weeks of September will be quieter in terms of earnings data, which is the same every quarter. Of all the sectors, Technology looks the best through year-end and into Q1 ’17 based strictly on sector earnings revisions. (Again, see the post from this blog from Thursday, August 18, 2016.)

The Energy sector looks good too, but I suspect Exxon-Mobil’s earnings and revenue miss from Q2 ’16, is weighing on the sector data.

More to come – thanks for reading.

 

 

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