In 2015, the “forward 4-quarter” earnings estimate for the S&P 500 turned negative in early April ’15 and stayed that way for all of 2015, as rapidly-declining Energy estimates and the strong dollar took its toll on S&P 500 earnings.
Already in 2016, crude oil has rallied roughly 40%-50% off its January-February ’16 lows and the dollar weakened roughly 7% this past week after the Fed talked about fewer planned rate hikes for 2016.
Stabilizing commodities and a weaker buck are “a good thing” (for S&P 500 earnings) as Martha Stewart would say, even though the S&P 500 earnings data has yet to incorporate the new market trends. Even Financials found a bid later this past week, as perhaps the energy credit scenario – i.e. massive defaults – may not be as apocalyptic as originally suspected.
One old saw or maxim learned years ago in investing was that “ultimately, fundamentals must follow technicals”.
It looks as if we are seeing sustainable bottoms in groups that have been in downtrends for years: crude oil, copper, gold, and commodities in general, Energy, Transports, etc. Only Biotech has yet to really turn, but its downtrend didn’t really start until August ’15 with the China correction.
However, S&P 500 earnings estimates haven’t yet moved. I think the sell-wide analysts want to wait and hear what Q1 ’16 Energy and commodity sector managements guide to for Q2 ’16 and beyond.
Thomson Reuters S&P 500 earnings data “by the numbers” (as of Friday, March 18, ’16):
- Forward 4-quarter estimate: $120.39 vs last week’s $120.67. In the last 4 weeks, the forward estimate has fallen about $1.
- P.E ratio: 17(x)
- PEG ratio: still elevated at 15(x) – core earnings growth probably closer to 3% – 4%
- S&P 500 earnings yield: 5.87% down from last week’s 5.97%. Anytime the S&P 500 earnings yield has dipped under 6%, the S&P 500 has usually corrected.
- Year-over-year growth of 4-quarter estimate: +1.08% vs last week’s +0.98%. This “y/y growth rate of the forward 4-quarter estimate” has languished now between -2% and +2% for the last 12 months, and must start to move higher if the S&P 500 is to make all-time highs.
Analysis / commentary: Most of this weekend’s stock market commentary is discussing how overbought the S&P 500 is, but it really isn’t if that S&P 500 forward estimate starts to move higher. And the fact is – as I learned painfully in 2008 – the S&P 500 forward estimate can remain quite “sticky” until the change is obvious. The fact that crude oil has rallied, the Energy sector is stabilizing, and the dollar is starting to weaken means that forward guidance should get somewhat more optimistic come April '16’s earnings releases, if only by a little bit.
If there is one thing that has been obvious off the post-’09 lows, and with the latest generation of Street analysts, earnings estimates don’t seem to move higher until the catalysts are obvious. Maybe put another way, there is no P.E expansion occurring at all in the market today and earnings growth is all that you are getting.
The Health Care sector didn’t really participate in this strong rally the last 6 weeks. Large-cap pharma stocks probably represent good value for investors if you can look beyond the Presidential election rhetoric. Biotech hasn’t gotten any traction either, but its bear market, while severe, is just 8 months old. Pfizer (NYSE:PFE) is our clients' biggest net large-cap pharma position, but some clients are long Merck (NYSE:MRK) too. A number of large-cap pharma names are testing their “200-week moving averages” when looking at the charts. (Client positions can change at any time, for fundamental or technical reasons.)
After a brutal start to Financials for the first 6 weeks of the year, if Energy and commodities stabilize, I do think Financials still work. The big banks are in great shape from a capital perspective: I still do not know why the sector traded the way it did through the end of February ’16, but who would have thought on December 31 ’15 that as of March 18 ’16 – looking at the SPDR ETFs like Financial Select Sector SPDR (NYSE:XLF) and Energy Select Sector SPDR (NYSE:XLE) – that Financia’s would be -5% year-to-date and Energy would be +5%. (Long both XLF, XLE)
The sectors that have been a significant drag on the S&P 500 for the last 18 months are starting to stabilize. The weak dollar helps immensely too, at first from a psychological or sentiment perspective, but ultimately from an economic perspective.
The catalysts are starting to emerge that can break S&P 500 earnings growth from its multi-year lethargy. Higher commodity prices, slightly higher core inflation from a wage and price perspective, and a weaker dollar; While these were the exact catalysts for the 1987 Crash in October, 1987, today, they could be the catalysts for a continued bull market. Higher commodity prices and higher inflation should be beneficial for S&P 500 earnings, particularly after the deflationary decade from 2000 through 2010, and then the Financial constriction that followed.