It was one year ago almost exactly the S&P 500 was in the midst of a powerful rally, after the China yuan devaluation, that started late July, 2015.
The rally started on “nonfarm payroll Friday” in early October ’15, with the S&P 500 opening lower on a weak September ’15 jobs number, and then reversing higher, and the subsequent rally then carried through to mid-to-late November ’15, and lasted 6 – 7 weeks.
Then, the final commodity flush started:
- After topping out the first week of November ’15, the Energy ETFs and crude oil started their final collapse into the January 21 – February 15, ’16 flush. The Energy Select Sector SPDR (NYSE:XLE) peaked near $72 in the first week of November ’15 and 6 – 8 weeks later was trading near $50, eventually bottoming there. (See chart below.)
- High yield spreads started to widen substantially, through February ’16.
- Commodity prices and Emerging Markets also started their final crescendo into the early ’16 bottom.
- The bank stocks were crushed in late ’15 – early ’16. I wrote at the time about a client that was a leasing officer in a major Chicago bank, where the OCC (why ?) came through and told the bank to write down their Energy credits/loans to zero, whether performing or not. (Presumably, if this was being done at one bank, by the regulators, it was being done at others.)
- Crude oil bottomed near $28 in Q1 ’16, basically wiping out the sector’s profits entirely in Q1 ’16.
- Early ’16 was the start of what is now called the Great Rotation: commodities were at the bottom of the “asset class” return tables, from 2011 through 2014, as well as Emerging Markets, and now that has begun to shift.
The point of this mini history lesson is that we are now starting to lap these comps as we roll into the last 10 weeks of 2016 and head into early ’17.
Here was this in late 2015, expecting a 10% return for the S&P 500 in 2016. I still think we get there by December 31 ’16.
Thomson Reuters S&P 500 earnings data (by the numbers):
- Forward 4-quarter estimate: $129.22, down slightly from last week’s $129.54.
- P.E ratio: 16.5(x)
- PEG ratio: 5.06(x)
- S&P 500 earnings yield: 6.06%, some nice rallies have started when the S&P 500 earnings yield has ended the prior week over 6%
- Year-over-year growth of forward estimate: +3.26%, and the highest print since early January ’15’s 5% growth rate.
Conclusion: To be upfront with readers, I thought this acceleration in the y/y growth rate of the forward estimate, would have started a year ago, but the October ’15 through Jan ’16 flush in commodities, particularly crude oil, delayed the ramp considerably. Q3 ’16 Energy earnings growth is expected to decline 70% y/y, but Q4 ’16 is expecting flat growth (see here). Energy earnings start this coming week with Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) (no positions), which is the most stressed of the Energy sector, i.e. the services companies with “deep-water” segments. (Schlumberger, and Halliburton are in a better competitive position than Transocean (NYSE:RIG) and Diamond (NYSE:DO), the two latter companies being deep-water drillers, which are thought to be in secular decline.)
Bottom-line: S&P 500 “forward” earnings growth should start to improve and take out the early ’15 high of +5%, over the next 6 – 9 months, or through Q2 ’17 earnings.
(One interesting tidbit: Thomson Reuters puts out the “This Week in Earnings” report on Friday night of each week, but cuts off the data as of Thursday night. Hence, this weeks “forward 4-quarter” estimate” does not include the major bank results of Friday morning, October 14 ’16. Nor does the “Financial Sector” expected earnings growth for Q3 and Q4 ’16, incorporate Friday morning’s bank results. Currently Q4 ’16 Financial sector growth is +15% – pretty good for the Financial sector – that could get revised higher this coming week. It’s been a long time since investors have seen a bank rally supported by earnings and revenue growth.)
