Every Friday night I print out Thomson’s earnings reports, Factset’s data and Bespoke’s Weekly Letter and crawl up at my Saturday-morning breakfast spot with the week’s reading and start to read and highlight what I think will not only be interesting for readers, but also relevant to making better investment decisions.
Here is one sentence that jumped out this morning at breakfast, From Factset:
“The 1.9% decline in the bottom-up EPS estimate for Q2 ’16 during the first two months of the 2nd quarter, was smaller than the trailing 1-year average (-3.95), the trailing five-year average (-3.2%) and the trailing 10-year average (-3.8%). In fact, this was the smallest drop in the first two months of a quarter since Q2 ’14.”
What that tells us, as investors, is that S&P 500 earnings revisions – despite it being a time during the quarter when there is typical downward pressure on the bottom-up and top-down estimate – are becoming “less negative”.
That is a good sign.
In my opinion, looking at the Thomson data, the big reason is forward estimate revisions for Energy have stopped falling (as I suggested here two weeks ago). Here is the same table from the Fundamentalis blog post linked in the previous sentence, updated with Friday June 3 ’16 numbers per Thomson:
- Q2 ’16: -76.1% expected Energy sector earnings decline vs. -77% as of April 1 ’16;
- Q3 ’16: -53% today vs. -54.7% as of April 1 ’16:
- Q4 ’16: +12.7% growth today vs. 11.1% as of April 1 ’16;
- Q1 ’17: N/A vs N/A as of April 1 ’16
- Full-year calendar 2016: -68.3% vs. -63.6% as of April 1 ’16;
- Full-year calendar 2017: +220%, vs 183.5% of April 1 ’16;
Note how Q4 ’16’s Energy growth has improved over just the past two weeks, from +7.9% two weeks ago, to +12.7% today.
That is telling in and of itself, given the consistent downward pressure on Energy estimates since March – April, 2015.
The 2nd drag on the S&P 500 since late 2014, besides Energy is Basic Materials. Here is how the forward estimates for “Basic Mat” fall out as of Friday, June 3rd:
- Q1 ’16: -12.1% actual as of June 3 ’16, vs the -19.9% estimated as of April 1 ’16;
- Q2 ’16: -9.7% today, vs -8.9% as of April 1 ’16;
- Q3 ’16: +13.2% today vs. 11% as of April 1 ’16;
- Q4 ’16: +24% today, vs +22% as of April 1 ’16;
- Q1 ’17: +23.8% today vs. 30.9% as of April 1 ’16;
- Full-year calendar 2016: +1.4% today vs -1.8% as of April 1 ’16;
- Full-year calendar 2017: +15.8% today +17.1% as of April 1 ’16;
Summary / conclusion: Part of the trick in scrutinizing earnings data is to not just think about the “absolute” data (sector earnings growth rates, etc. and the S&P 500 numbers) but also to look for subtle changes in revisions amongst and between sectors. The Energy and Basic Materials sectors are seeing upward revisions to forward quarterly estimates, at a time when there is typically downward pressure on those forward growth rates.
That tells us something. The upward revision to Energy’s Q4 ’16 growth rate sticks out like a sore thumb today.
Thomson Reuters data (by the numbers):
- Forward 4-quarter EPS estimate for the S&P 500 rose to $123.29, vs. last week’s $123.26. This was the 4th consecutive week where the “forward 4-quarter” estimate rose sequentially. Again, this is unusual since normally at this point in each quarter, we would see downward pressure on the forward 4-quarter estimate.
- P/E ratio: 17(x)
- PEG ratio: 17.8(x)
- S&P 500 earnings yield: 5.87%, same as last week.
- Year-over-year growth rate of the forward estimate: +0.96%, same as last week.
It may not happen until early July, but my expectation has been that the “forward 4-quarter growth rate” for the S&P 500 will pop higher, but analysts (in my opinion, and for good reason) remain reluctant to boost forward estimates given the market environment.
I’ll say unequivocally that the Energy and Basic Materials drags are ending. Apple’s (NASDAQ:AAPL) 5% earnings weight in the S&P 500 is the subject for another time, but that is a the latest drag on the benchmark.
While Friday’s payroll report was a hot topic, the sharp drop in the dollar it caused resulted in rallies in Emerging Markets (EEM, VWO, and long both) and the commodities sectors. The “Great Rotation” which stalled in May ’16 and which we wrote about last week, got a second wind Friday.