Having written a weekend blog post on trends in S&P 500 earnings data for the last 20 years, it’s important to reiterate or at least remind readers that monitoring S&P 500 EPS data, won’t necessarily call a lengthy market top for the main stock market benchmark.
Remember, when a correction starts, investors don’t know the length or depth of the correction as it’s starting. Tim Geithner, former Secretary of the Treasury under President Obama, and author of “Stress Test”, a book on the 2008 Financial Crisis, made an astounding admission in the book: Tim said,
“When a recession starts, the Fed starts pressing buttons, and then waits for capital market reactions.”
S&P 500 earnings are – at best – a coincident indicator, and probably more of a lagging indicator relative to the benchmark itself.
Seriously, watching the benchmark itself, and the technical aspects of market tops and bottoms is (probably) a better way to try and decipher whether a market has put in a longer-term top, than earnings watching.
In the October, 1987, stock market crash, the Dow Jones 30 (the notable index at the time), lost 25% of it’s value on Monday, October 19th, 1987, after peaking in July ’87.
There was a noted market technician at the time named Elaine Garzerelli who I think was at Lehman Brothers, who may not have called the exact top but the she got the firm’s clients out of the stock market who wanted to market time, for that fateful October 19th drop.
The ensuing problem for Elaine was that over the next few years she called a few more tops – Elaine may have used Elliott Wave analysis as one of her tools – only to have the stock market move forward in 1988 and 1989, and after the Gulf War 1 started in January ’91 and the stock market took off again as Greenspan cut the fed funds rate, Elaine became increasingly less relevant.
The S&P 500 earnings data never really supported the Dow Jones and the S&P 500 market crash in 1987, since S&P 500 earnings grew 15% in 1988, and then grew a whopping 46% in 1989 (yes, S&P 500 earnings grew +46% in 1989, as the full-year S&P 500 EPS ended 1988 at $17.75, and then grew to $25.83 in 1989), even though the high-yield credit (junk bond) market started to tank in 1989, after the United Air Lines (UAL) junk bond refinancing collapsed.
After the October, 1987 market crash, the S&P 500 regained it’s previous all-time-high, and went on to new all-time-highs, within 24 months of the event.
What’s interesting about the S&P 500 and Nasdaq tops in March, 2000, is that the S&P 500 earnings drop wasn’t all that bad for this bear market, where the S&P 500 corrected 50% and the Nasdaq fell 80%.
Here’s the numbers:
- 2003 S&P 500 EPS: $55.14 (S&P 500 earnings rose 16%, the S&P 500 rose 29% on the year, bottoming w/ start of 2nd Gulf War in March, ’03)
- 2002 S&P 500 EPS: $47.94 (S&P 500 earnings rose 6%, while the S&P 500 fell 22% in calendar year)
- 2001 S&P 500 EPS: $45.16 (S&P 500 earnings fell 18%, while the S&P 500 fell 12% in calendar year)
- 2000 S&P 500 EPS: $55.12
Looking at the above bullet points – in 2001 and 2002 – the S&P 500 fell a cumulative -33% even though the S&P 500 EPS fell just a cumulative 12%, over the 2-year time period.
In 2008, because of the damage to the financial system, and the associated recession, here’s how the progression looked:
- 2010 S&P 500 EPS: $85.28
- 2009 S&P 500 EPS $60.80
- 2008 S&P 500 EPS $65.47
- 2007 S&P 500 EPS: $85.12
In 2007 – 2009, the S&P 500 fell 37%, while the S&P 500 had it’s 2nd 50% correction for the decade.
2001 and 2002 was a growth stock, tech stock, and large-cap correction, while 2008 was a broader, recession and residential real-estate driven correction,
In 2015, S&P 500 fell 1% year-over-year from $118.78 to $117.46, but it was strictly a crude oil and energy correction. In September of 2014, crude oil was priced around $80 – $90 per barrel, but by January – February, 2016 it bottomed at $28.50 per barrel, and the energy sector, which was 14% – 15% of the S&P 500’s market cap in September, ’14, had fallen to 4% of the S&P 500’s market cap by Q1 ’16.
This was all driven by fracking and enormous amount of new supply of crude coming on to the market.
Surprisingly, the S&P 500’s total return in 2015 was +1.36%.
S&P 500 data:
- The forward 4-quarter estimate rose to $263.38 last week, versus the prior week’s $263.01.
- The PE ratio on the forward estimate rose to 22.7x after this week’s +1.68% rally;
- The S&P 500 earnings yield fell to 4.41%, versus the 4.62% at the beginning of the November, thanks to the post-election rally.
- The S&P 500’s EPS “upside surprise” this quarter is still pretty healthy at +7.6%.
A few companies report this week, like Best Buy (NYSE:BBY) (BBY) and Dell (NYSE:DELL). No positions are owned for clients for any reporting companies this week.
Conclusion:
For those readers who like to look at S&P 500 earnings trends, the data isn’t particularly helpful in calling major tops or bottoms for the stock market. When a top does occur, investors know neither it’s duration or depth.
With the March, 2000, market top for the S&P 500 and the Nasdaq, I don’t think anyone suspected that the S&P 500 wouldn’t make a new all-time-high until May, 2013, and that the Nasdaq would drop 80% in the ensuing two years.
Also, the behavior of S&P 500 earnings over the two 50% market declines by the S&P 500 were markedly different because the nature of the bear markets were markedly different.
This blog is considering various changes to tracking S&P 500 earnings data that might be more helpful to readers.
This blog is being written on Sunday night, November 24th, ’24. S&P 500 futures are up sharply as we are in one of the seasonally-strongest periods of return for the S&P 500, i.e. November and December of every year. Bond yields are down and the dollar is also weakening. Bloomberg is reporting that PIMCO said over the weekend that Treasury yields over 4% are attractive on their own, which is a nice way of saying “buy bonds”.
Disclaimer: None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can and does involve the loss of principal, even for short periods of time. All S&P 500 EPS and revenue data is sourced from LSEG. This information may or may not be updated, and if updated, may not be done in a timely fashion.
Thanks for reading.