SP 500 “Forward 4-Quarter EPS Estimate” Finally Climbing Smartly

Exxon-Mobil (XOM) and Chevron (CVX) report this coming Friday, and since Energy has been the biggest drag on the SP 500 in terms of earnings growth the last two years, and Exxon and Chevron constitute the lion’s share of the Energy sector’s net income and EPS, basically as goes XOM and CVX, so goes Energy’s earnings prospects. The financial results of both international, integrated oil giants are crucial for the SP 500.

More importantly the ramp in the “forward 4-Quarter” SP 500 earnings estimate has started to turn significantly higher, but Exxon and Chevron need to print some good numbers this coming Friday, October 28th, AND crude oil needs to continue it’s steady rise.

Here is the progression in the SP 500 “forward 4-quarter EPS estimate” since the summer: (the actual dollar estimate and the y/y growth is provided)

  • 10/21/16: $129.16, +3.83%
  • 9/23/16: $125.13, +2.03%
  • 8/26/16: $125.88, +1.66%
  • 7/22/16: $126.45, +1.08%
  • 6/24/16: $122.96, +0.97%
  • 5/20/16: $123.24, +0.94%

Source: Thomson Reuters, This Week in Earnings (subscription)

If the time period has been shortened to the last 5 weeks, instead of the last 5 months,  the reader would see a sharper acceleration and a lot of this is due to Energy sector projection earnings and revenue growth over the Q4 ’15 and Q1 ’16 quarters when the sector was decimated as crude fell from the mid $40’s to $28 last year.

The other less obvious reason for the increase is that Financials and Technology, still the lion’s share of the SP 500 (as a benchmark) from an earnings weight perspective, are seeing upward revisions to earnings growth for Q4 ’16. Apple reports Tuesday night, and while iPhone production was thought to be constrained for the September quarter, the Samsung woes, whould have the iPhone giant grabbing gobs of market share for the December quarter.

But the big surprise for Q4 ’16 is watching Financial sector earnings growth get taken higher, which means that the Street is likely expecting the seasonal, expected 4th quarter market rally:

  • 10/21/16: +16%
  • 10/14/16:+15.4%
  • 10/7/16: +15.7%
  • 9/30/16: +9.5%

The Financial sector seeing upward revisions at a time where the typical forward revision is being taken lower, usually portends higher capital markets, at least that was the case in late 2012 and early 2013.

This isn’t yet a call that Financials will outperform in 2017, but the 4th quarter estimate revisions portend favorable for the next 8 – 10 weeks.

Thomson Reuters data (by the numbers): 

  • Forward 4-quarter estimate: $129.16, versus last week’s $129.22
  • P.E ratio: 16.58(x)
  • PEG ratio: 4.3(x)
  • SP 500 earnings yield: 6.03%
  • Year-over-year growth of the forward estimate: +3.83% versus last week’s +3.26%


Summary / conclusion: Client’s largest sector overweight remain Technology and Financials, which are the two largest sectors in the SP 500. The Energy sector weighting was also lifted to over 10%, versus the 6% – 7% market cap weighting in the SP 500, although that could change with how the integrated giants report this coming Friday morning, 10/28/16. Clients Energy exposure consists of the XLE, IYE, and the OIH.

Q4 ’16 earnings indicate the SP 500 should see it’s standard 4th quarter rally and probably sometime soon. Possibly the election is delaying the inevitable.

The key level for the 10-year Treasury yield is roughly 1.82% – 1.83%, which is the 50-week moving average. Through that level on the 10-year Treasury yield, we could see another 20 – 30 bp’s to the upside easy.

The SP 500 earnings yield remains over 6%, usually a level that triggers a nice rally, and what is more positive is that the yield is coming from higher expected earnings, not a decline in price.

Unless something pretty unexpected and remarkable happens on November 8th, I do think the SP 500 is headed higher and through the Sept ’16 all-time-high of 2,193 – 2,194.


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