{"id":3298,"date":"2014-02-15T22:26:33","date_gmt":"2014-02-15T22:26:33","guid":{"rendered":"https:\/\/fundamentalis.com\/?p=3298"},"modified":"2014-02-15T22:26:33","modified_gmt":"2014-02-15T22:26:33","slug":"2-15-14-updated-2014-sp-500-earnings-scenario","status":"publish","type":"post","link":"https:\/\/fundamentalis.com\/?p=3298","title":{"rendered":"2.15.14: Updated 2014 SP 500 Earnings Scenario"},"content":{"rendered":"

Here<\/a> is our January 6th, 2014 EPS scenario, and here<\/a> is our first crack at 2014 earnings from back in mid-November ’13.<\/p>\n

To simplify the math and the reading comprehension, we plan on updating the 2014 EPS estimate every 6 weeks or so, around the middle of each quarter and then around the first week of the quarter:<\/p>\n

Current top-down 2014 EPS estimate: $117.58<\/p>\n

Current bottoms-up 2014 EPS estimate: $119.40<\/p>\n

Average of the 2014 estimates: $118.50<\/p>\n

Current 2013 top-down estimate: $108.99<\/p>\n

Current 2013 bottoms-up estimate: $109.44<\/p>\n

Average of the 2013 estimates: $109.25<\/p>\n

$118.50 \/ $109.25 = 8.5% expected EPS growth in 2014.<\/p>\n

Since such a large component of the SP 500’s return is “p\/e expansion” and the SP 500 (per our Weekly Earnings Update) has been averaging a PEG ration of 2(x) – 2.5(x), then a conservative estimate of the p.e ratio assuming 8.5% earnings growth in 2014, would be a PEG of 2(x) or 17(x) that earnings growth.<\/p>\n

2013 ending value for SP 500: 1,848.36<\/p>\n

$109.50 * 1.085 = $118.80, times a 17(x) multiple = 2,019.73 estimated ending value for the SP 500 on 12\/31\/14.<\/p>\n

2,019.73 \/ 1,848.36 = 9% expected market return using the more conservative estimates (i.e. average earnings, modest p.e ratio). We think this might be a tad conservative.<\/p>\n

If we used a $110 ending estimate for 2013, and expected 10% earnings growth for 2014, that would result in an ending EPS of $121 and assuming a 2(x)\u00a0PEG of the 10% growth, or\u00a0a 20(x) ending ’14 p.e. the ending value for the SP 500 on 12\/31\/14 could be 2,420 or what would be a 30.9% return for the SP 500 (2,420 \/ 1,848.36). We think that this estimate is too aggressive.<\/p>\n

Small changes in earnings estimates, earnings growth rates and multiple’s, can result in large changes in return forecasts. Look at the difference in an 8.5% earnings growth rate and 17(x) multiple versus a 10% earnings growth rate and a 20(x) multiple.<\/p>\n

Our best guess is still that we could see a 20% year for the SP 500. That is a BIG “could”, though. Byron Wein was out on CNBC yesterday saying the same thing. Not sure how he got there in terms of the math.<\/p>\n

Although it seems like a meaningless metric, on April 1, I will be anxiously watching what Thomson Reuters sets as the “final” SP 500 EPS number for 2013, i.e. $108.99, $109.50 or even $110.\u00a0That 2013 final EPS estimate\u00a0matters – that will be the base we will set for the next 2014 EPS update slated for April 1, 2014.<\/p>\n

Thanks for reading. It seems involved, but it is really simple math.<\/p>\n

Trinity Asset Management, Inc:<\/p>\n

Brian Gilmartin, CFA<\/p>\n

Portfolio manager<\/p>\n

 <\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Here is our January 6th, 2014 EPS scenario, and here is our first crack at 2014 earnings from back in…<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[93],"tags":[],"class_list":["post-3298","post","type-post","status-publish","format-standard","hentry","category-sp-500-forecasts"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/3298","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3298"}],"version-history":[{"count":7,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/3298\/revisions"}],"predecessor-version":[{"id":3305,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=\/wp\/v2\/posts\/3298\/revisions\/3305"}],"wp:attachment":[{"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3298"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3298"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fundamentalis.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3298"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}