Per Thomson Reuters', ‘This Week in Earnings” the forward 4-quarter S&P 500 estimate rose to $127.07 last week, from the prior week’s $126.75.
The P/E ratio on the forward estimate is now 15.5(x) and the PEG ratio (P/E-to-Growth ratio) of the S&P 500 has fallen to 1.76(x) the lowest since July 6th, 2012′s PEG of 1.48(x).
On July 6th, 2012, the forward 4-quarter estimate for the S&P 500 was $110.94, and the P/E ratio was 12.2(x). (I’d love to tell readers that the PEG has some predictive value regarding forward returns for the S&P 500, but through late 2012 and all of 2013 the PEG was within the high 2s, low 3s range.) What the PEG ratio might speak to is the unending cacophony by CNBC guests about the “record P/E” ratio on the S&P 500 and S&P 500 valuation. The fact is, in my opinion, using S&P 500 earnings data, the S&P 500 trading at 15.5(x) forward earnings earnings, with expected growth of 7% – 9% this year, just doesn’t seem that expensive.
The earnings yield on the S&P 500 for our Fed model fans, as of July 18th, 2014, is 6.42%. The earnings yield on the S&P 500 has steadily fallen as the appreciation in the S&P 500 has been faster than the annual earnings growth.
Most importantly, the year-over-year (y/y) forward 4-quarter growth rate on the S&P 500 jumped to 8.85%, the highest y/y growth rate since Jan 13, 2012′s 9.40%.
As we wrote on this blog last week here, the y/y growth rate of the S&P 500′s forward estimate is something that needs to be monitored.
Analysis / commentary: Bespoke had some good graphs and commentary on the low volatility we are seeing across many markets, not just the S&P 500, but at some point we should have a healthy 5% – 7% correction in the S&P 500, as we have had since the summer meltdown of 2011. Healthy markets correct, and the S&P 500 still needs a good flush. If memory serves, it has been over 360 – 370 trading days since the S&P 500 has touched its 200-day moving average.
Financial earnings this past week, including JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC) and even General Electric (NYSE:GE) (yes you can think of GE as a financial) had decent earnings reports, in my opinion. Year-over-year earnings growth for Financials has fallen from -3% last week to -8% as of Friday, July 18th, but we now think this will be the bottom for the sector. According to Thomson Reuters, the Citigroup (NYSE:C) charge cost the S&P 500 1.7% in expected Q2 ’14 total S&P 500 earnings growth.
Per Facstset, and despite JPM’s warning in mid-quarter about the fixed-income market trading slowdown, Capital Markets within Financials are reporting the highest y/y growth at 22%.
The S&P 500 is now expecting 5% Q2 ’14 y/y earnings growth, but if we ex Citigroup (C) from the S&P 500, expected earnings growth increases to 6.7%. (Thomson Reuters did not provide C’s impact on just the Financial sector’s expected growth. Assume it is quite material.)
Factset notes that with 82 of the S&P 500 companies having reported, the “revenue beat rate” of 70% quarter-to-date is at a record high. That would be a significant change to the quarterly patterns if its holds up through the end of July and mid-August, 2014.
Per Factset’s John Butters, Energy, Financials and Healthcare are the sectors with the greatest upside surprises. (Energy’s revenue upside surprise is unexpected I would imagine. Bodes well for the sector, but was it a function of Iraq-driven bump in crude oil prices in Q2 ’14 ?)
Although less than 20% of the S&P 500 has reported, the big takeaway this past week was that the Financials are in good shape, expectations may have gotten too low, and the Capital Markets may not be dead, even with low volatility. We sold Goldman (NYSE:GS) last January ’14 in all accounts and will remain out of the name until the stock trades into the mid $140s. If you want to play capital market activity, JPM, and BAC and even Morgan Stanley (NYSE:MS) will work, and could be nice trades through year-end 2014. (Long JPM, BAC).
Energy’s numbers are looking better too. We’ve never been good investors in the group, and while Exxon (NYSE:XOM) and Chevron (NYSE:CVX) are thought to be the low-beta names, and thus thought to be safer, we will avoid for now. I think the oil services like Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) are too extended technically (long only HAL in the Energy sector, and Peabody Energy Corporation (NYSE:BTU), which could be Energy or Basic Materials).
Conclusion: Q2 ’14 earnings are off to a decent start. 2014 full-year S&P 500 earnings growth is still expected at 8.7% per Thomson Reuters. The revenue upside noted by Factset is a pleasant surprise. Let’s see if it holds up through the bulk of earnings this coming week. It is a positive that the dollar estimate rose week-over-week in the first heavy week of earnings reporting by S&P 500 companies. The improvement in the y/y forward growth rate for the S&P 500 continues. Remember though, in 1994, the S&P 500 grew earnings 19% and the S&P 500 rose 1% in that calendar year, as the Greenspan lifted interest rates 6(x) in that remarkable year. S&P 500 earnings are a fundamental positive for this market, but the S&P 500 is also overdue for a decent correction.
The corporate high yield market has started to correct. The iShares High Yield Corporate Bond fund (ARCA:HYG) (high yield ETF) is officially oversold. Typically, credit market corrections precede equity market corrections.