Energy and Basic Mat are just 10% of the S&P 500, but commodities as an asset class have been at the bottom of the asset class return table for the last 5 years.
However that began to change in February ’16.
The “Great Rotation” talked about this Spring (here) has begun to play out in earnest, and it looks like it will continue. Much of the rotation (I thought) would be catalyzed by a steady-to-slightly-weaker dollar, but even with the dollar’s strength post-Brexit, commodities, Emerging Markets, and the out-of-favor sectors didn’t give much back.
Even though the S&P 500 was up just 1% in 2015 and now is up just 2%-3% in 2016 YTD, the leadership groups are VERY different. FANG and large-cap growth led last year’s 1% return. This year it is large-cap value and bond proxies like Utilities, Telco, high-dividend large-cap, and moving off the bottom is the laggard groups like Energy, Basic Mat and commodities.
Readers won’t hear from the Energy and Basic Mat sectors until late July ’16. Usually Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) report first in mid-July, which are the oil services giants. If readers own Exxon (NYSE:XOM) and Chevron (NYSE:CVX), you own roughly 25%-40% earnings weight of the sector. (Long XOM small position. Energy Select Sector SPDR (NYSE:XLE), iShares US Energy (NYSE:IYE) in larger weights.)
Thomson Reuters (by the numbers):
- Forward 4-quarter estimate: $122.76
- P/E ratio: 17(x)
- PEG ratio: -7.50(x)
- S&P 500 earnings yield: 5.84%
- Year-over-year growth of the forward estimate: -2%.
Analysis / conclusion: The forward estimate next week jumps to $127, which – if the spreadsheet is extended – means the y/y growth rate of the forward estimate is still just 1.2%. The expectation was that readers would see higher year-over-year growth with the new forward 4-quarter estimate.
In order to see S&P 500 “P/E expansion” my guess is that the year-over-year growth rate of the forward estimate must start to grow.
The drags on S&P 500 earnings are diminishing. Expect a decent quarter of results when S&P 500 earnings start with Alcoa (NYSE:AA) on July 11th.
Is Brexit a 5th drag on the S&P 500? It certainly doesn’t help. Great Britain is the world’s 5th largest economy. It is another reason for management’s to guide cautiously in a market environment filled with reasons.
Watch the forward earnings and revenue estimates. They are the true “tale of the tape”.
I do think Q1 ’16 will – in hindsight – be the bottom for S&P 500 earnings, and that the 2nd quarter, will see much better numbers, and thought that three months ago, and here as well.