The headline continues to be the $64,000 question, regarding SP 500 earnings.
The reason the probability for SP 500 earnings bottoming in Q1 ’16 is starting to gain some traction is the action in commodities, and the action in the US dollar, which is slowly weakening.
No question the drag on SP 500 earnings the last 18 months, has been Energy and the Basic Materials sectors, but even the “core SP 500 earnings” (ex-Energy and Basic Mat) has declined from +9% in Q1 ’15 to roughly 2.5% (and this chart needs to be updated) as of Q4 ’15. (In the linked blog post, find the attached spreadsheet showing Q4 ’15 earnings expectations, “ex” a number of factors.)
The big puzzle the last 6 months has been the commodity collapse and how it has impacted not just the credit markets, but also the Financial sector and stock market sentiment. Corporate high yield has rallied sharply the last few weeks presumably as the commodity complex has rallied considerably, which – if sustained – should also ultimately benefit the Financial sector, and given the trade the last few years, Emerging Markets. (Heard directly from one person at lunch this quarter, in a lending capacity for a major bank: “the regulators came through and had us write down to zero any Energy-related credit, whether current and performing, or not.”)
Per Briefing.com, the Dollar Index traded down to 96 and change this week. The dollar index hit a high of just over 100 on March 22nd, 2015, in a dramatic strengthening that started in October, 2014, and was coincident with the drop in the price of crude. The strengthening in the dollar index was truly historic from October, 2014, to March 22nd, 2015 in terms of the degree of strengthening, which wreaked havoc on SP 500 revenue and revenue guidance in 2015. (I think it was Bespoke that noted the unprecedented degree of dollar strengthening last March ’15.)
Which metric do I think is more important ? Well, between the two, I’d prefer to see commodity prices continue to stabilize, particularly crude. However the dollar slowly weakening – I think – will provide some sentiment and psychological relief for executives around forward guidance for the rest of 2016.
The Fed meeting this week could be “bullish on America” for all you oldies who remember the Merrill Lynch slogan of the late 1970s. Given employment, some nascent stirrings in inflation, and the jobless claims number this week, which was very strong, the Fed could be closer to another 25 bp’s than many might think, and that some of the SP 500 weakness could be attributed to the slow withdrawal of liquidity. Ultimately a “normalization” of interest rates (as long as it is relatively slow and measured) is a good thing for the US economy and the stock market.
SP 500 earnings data “by the numbers” (courtesy of Thomson Reuters):
Forward 4-quarter estimate: $120.67, down from last week’s $120.95
P.E ratio: 17(x)
PEG ratio: also 17(x), way elevated given -1% SP 500 earnings growth in 2015 and an expected 1% growth rate in 2016
SP 500 earnings yield: 5.97%, which is below 6%. The last time the SP 500 earnings yield was below 6% was late December ’15 and late December ’14.
Year-over-year growth rate of forward estimate: 98 bp’s vs last week’s 1.13%. We want that growth rate to remain positive.
Analysis / commentary: This coming week we hear from a number of different large-cap companies including Fed-Ex (NYSE:FDX), Oracle (ORCL), Lennar (NYSE:LEN) and Tiffanys (NYSE:TIF), in no particular order. (Long all except TIF in smaller quantities.) Fed-Ex will provide the best insights into regional economic trends in the US, Europe and Southeast Asia, particularly China. Oracle, a mega-cap tech giant, is struggling with the transition to the Cloud, although I wouldn’t bet against Larry Ellison or his crew. With these four companies we get insights into economic trends from companies with a February ’16 month end. The key is to listen to what has changed since the start of the 2016. Better or worse ?
The commodity price rally across all commodities, and the dollar slowly weakening are important trends moving in the right direction.