CNBC has been working hard to make earnings season sound relevant. Bob Pisani was breathless this past week, saying “S&P 500 earnings are at a record high”, which is technically inaccurate.
With all due respect to Bob, who I think is a decent reporter in terms of his market coverage, S&P 500 earnings hit an all-time high in early April, when the “forward 4-quarter” estimate was pegged at $115.33, but the forward estimate has slid since then, which is perfectly normal in terms of its regular quarterly pattern.
As of Friday, May 3rd, the “forward 4-quarter estimate” number for the S&P 500 is $113.84, down from last week’s $114.01, but still above the last day of March estimate of $111.84.
As long as the forward 4-quarter estimate doesn’t slide below $111.84, the trend in forward earnings is still positive.
As of Friday, the P/E ratio on the forward estimate is 14(x).
The earnings yield is currently 7.05%.
The year-over-year growth of the forward estimate rose a little last week to 3.79%, versus the prior week’s 3.75%, which we hope to continue to see since as we moved through this period in 2012, earnings started to soften.
Remember, it was Q1 and Q2 ’12 that were the strongest quarters in terms of year-over-year growth, and it was the 3rd and 4th quarters of 2012 that were weaker.
Here is our latest call from April 14th, noting that Q1 ’13 S&P 500 earnings would likely grow at least 5%. It really isn’t rocket science. The patterns we see around S&P 500 earnings are remaining fairly constant.
Wall Street or sell-side analysts have continually low-balled the S&P 500 results for some time, but particularly the last two quarters.
For Q1 ’13, the S&P 500 earnings growth (per ThomsonReuters) is now +5.1%, while revenue growth is flat at 0% per the latest data.
Stat of the Week: S&P 500 year-over-year earnings growth rates:
Q1 ’13: +5.1% (est) – earnings season isnt officially over until Wal-Mart (WMT) reports on May 16. (long WMT)
- Q4 ’12: +6.3%
- Q3 ’12: +0.1%
- Q2 ’12: +8.4%
- Q1 ’12: +8.1%
- Q4 ’11: +9.2%
The above are actual S&P 500 earnings growth rates for the last 6 quarters, so readers can see how the first half of 2012 compares with the 2nd half of 2012. I still think we see a 10% year-over-year earnings growth rate for the S&P 500 in one of the last two quarters of 2013.
That would be the best growth rate in at least 8 quarters.
The bears would say that with a 14(x) multiple currently on the S&P 500, and a 5% growth rate, we are reaching the upper-end of the P/E to growth valuation. The negative-to-positive preannouncements are also running higher than usual, but we saw the same thing in late March, and yet the negative preannouncements or guidance haven’t really materialized into market weakness.
We have close to record earnings, and a record all-time high for the S&P 500 and yet very few are excited. Could this go on for a while?
Financials: I am amazed at how the earnings growth has held for the sector the the last 3 quarters, although with the national housing recovery maybe that shouldn’t be a surprise. Here is the progression in Financial sector earnings estimates for Q1 ’13:
- May 3 ’13: + 19.2%
- April 1 ’13: +11.0%
- Jan 1 ’13: +9.6%
Most of the Financial sector has already reported their Q1 ’13 results so, the Q1 ’13 results will hold up. With 395 of the 500 companies within the S&P 500 reporting, the numbers are close to inked, although the earnings season doesn’t officially end until mid-May.
For 2013 as a whole, the sector continues to see higher revisions, which is somewhat normal given the record high in the S&P 500 and Dow 30, but is running against the grain of the S&P 500 as a whole:
- May 3 ’13: +17% (est), +10.3% (S&P 500)
- Apr 1 ’13: +15.4% (est), +8.2% (S&P 500)
- Jan 1 ’13: +16% (est), +7.6% (S&P 500)
We remain overweight Financials and continue to use weakness, like JP Morgan (JPM) this past week, to add to the name and the sector.
JP Morgan’s action is frustrating: the stock was down Friday on news of more regulatory investigations into JPM’s energy trading business in California. Jamie needs to get the bank out of the headlines and off the regulator’s radar screens.
JPM’s earnings estimates continue to move higher. The stock should be trading at $55 instead of $47 and change:
JPM’s 2013 est, 2014 est as of:
- 04/30/13: $5.66 and $5.93
- 01/31/13: $5.34 and $5.75
- 10/31/12: $5.31 and $5.69
- 07/31/12: $5.21 and $5.63
The only fundamental negative I can see is the $99 billion revenue estimate for 2013 has been revised from $101 billion over the last 12 months. With flat revenues expected, JPM is making it up in expense savings. The EPS revisions are positive.
The sentiment is a big concern: everyone loves JPM. Even Warren Buffett blessed Jamie Dimon this weekend.
Charles Schwab (SCHW) is a noteworthy financial as well. We’re talking our book though. JPM and Schwab are two of our largest financial positions.
WMT and the do-it-yourself home improvement retailers such as Home Depot (HD) and Lowe's (LOW) report this coming week. We start retail earnings season this coming week, and through the end of May. (Long WMT, HD, LOW)
Only jobless claims were a tipoff to this past Friday’s strong jobs report.
One of the best tweets we saw Friday read: “I can’t believe I’m excited about a US economy that has created 165,000 jobs in April” (source unknown).
This is a market of low expectations, for sure.
None of our holdings reports earnings this week, except Whole Foods (WFM). Long WFM.
Longer-term: overweight equities and overweight credit exposure in balanced accounts. Has paid off for our clients.