The stock market has long been considered a “leading economic indicator” and is thought to discount S&P 500 earnings and economic activity 6-9 months forward. If you think back to the Financial / Mortgage Crisis of 2007-2008, the S&P 500 peaked in October ’07, 11 months in advance of the Lehman default.
Looking not just at the “forward 4-quarter” earnings estimate for the S&P 500 this week, but the “bottom-up” data from Thomson, it looks as if the forward estimates are seeing less-onerous negative revisions as we move forward each week.
Currently, S&P 500 earnings data is forecasting 14% earnings growth for next year, which sounds good, but the expectations for 2016 at one point were for 8% growth, and today it's at 1% expected full-year 2016 EPS growth, primarily due to the Energy and Basic Materials drag on the S&P 500.
Like looking at “2-year stacked” comps for retailers, we have to average 2016 and 2017 expected earnings growth for the S&P 500, which today would be 8%.
In this post from 4-5 weeks ago, the lead was buried at the bottom of the post: note how the S&P 500 earnings estimates have remained stuck around $118 per share the last three years. That is the problem with the S&P 500 today: there is no P/E expansion, and the S&P 500 is just “walking up” based on S&P 500 earnings growth, and there hasn’t been any earnings growth at all.
Thomson Reuters data “By the Numbers:
- Forward 4-quarter estimate: $123.24 this week, versus last week’s $123.00. Let’s see if that continues. It is unusual to see that kind of increase week-over-week. Normally the big jump in the forward estimate occurs at the start of each quarter.
- P/E ratio: 16.6(x)
- PEG ratio: 17(x) this metric has been immaterial for a while with little forward growth in the forward estimate
- S&P 500 earnings yield: 6.00% this week, the 6th consecutive week between 5.96% and 6.01%
- Year-over-year growth of forward estimate:
- 5/20/16: +0.94%
- 5/13/16 +0.78%
- 5/06/16: +0.69%
- 4/29/16: +2.09%
- 4/22/16: +1.81%
You can see the gradual improvement, but the increases in the y/y growth rate of the forward estimate are small and I think that is what is holding back the S&P 500.
Conclusion: More and more pundits are coming out and commenting on S&P 500 earnings and forward earnings, and I think that is a good thing, since the reason I started the blog was to delve into an important area of the market which – at least from the layman perspective – wasn’t well covered. (Jeff Miller, the author of “A Dash of Insight” and one of the more successful bloggers out there today, actually encouraged me to start www.Fundamentalis.com, and focus on S&P 500 earnings dissection, to dig into the topic further, when we were both writing for Jim Cramer’s www.thestreet.com.)
Cam Hui, who started the “Humble Student of the Market” blog, posted this on Friday, May 20th to Twitter which looks at Factset’s graphical portrayal of the S&P 500 index versus S&P 500 earnings growth.
Here are the conclusions for the week:
- Q1 ’16 will be the bottom for S&P 500 earnings growth, forward revisions are becoming less negative, thanks to Energy and Basic Materials.
- Coming into 2016, our expectation that the S&P 500 would be up 10% on the year, is still unchanged.
- I do think the S&P 500 forward 4-quarter estimate will improve materially after July 1, ’16 and we should see a decent, seasonal Q4 ’16 rally, even if the 2016 Presidential election and rhetoric keeps everyone nervous.
Remember, if, in 2017, the S&P 500 earnings growth is JUST 10%, it will be the first time in 5 years, the S&P 500 has seen “double-digit” earnings growth.
Here is the annual S&P 500 earnings growth coming out of the Great Recession of 2008-2009:
- 2016 +1% (est)
- 2015: -1% (actual)
- 2014: +8%
- 2013: +6%
- 2012: +6%
- 2011: +15%
Readers and pundits might conclude I am the proverbial village idiot, but if 2017 earnings growth materializes to anything close to the growth rate currently being forecast, then we could see a powerful S&P 500 rally.
The negative sentiment is also keeping me leaning in this direction. There are no table-pounding bulls on CNBC anywhere to be found.