Thomson Reuters data “by the numbers”:
- Forward 4-quarter estimate: $123.01 this week versus last week’s $123.17.
- P/E ratio: 16.7(x)
- PEG ratio: 24(x) still volatile based on the volatility of the growth rate and almost completely irrelevant as a metric for now.
- S&P 500 earnings yield: 5.98%, or 3rd week in a row between 5.96% and 5.98%.
- Year-over-year growth of forward estimate: drops to +0.69% versus last week’s 2.09% and ends the 4-week string of increases.
Analysis: The most puzzling and frustrating aspect to S&P 500 earnings—and why being “table-pounding” bullish on the S&P 500 and the general equity market is ill-advised—is that tracking the “year-over-year growth rate of the forward 4-quarter estimate” (referred to as “the growth rate”) remains a lesson in frustration. Last fall, mid-October ’15 to be exact, I thought the growth rate would start to gradually increase through year-end and the 4th quarter of 2015 as the S&P 500 lapped easier crude oil and Energy sector compares, and the strong dollar ramp.
Instead, the growth rate remains mired between 0%-2%, and stuck in the mud, even though crude oil and commodity prices have rallied, and the dollar index (DXY) has fallen from 100 to 92.
Here is the progression in the growth rate the last five weeks:
- 5/6/16: +0.69%
- 5/1/16: +2.09%
- 4/22/16: +1.81%
- 4/15/16: +1.09%
- 4/8/16: +0.95%
Just as the number starts to show signs of life, this past week it was hammered once again.
The one caveat is that this is a “top-down” estimate or partially a top-down estimate, so forward estimates put out by bearish strategists could be unduly influencing the forward estimates.
The other explanation, as was noted here, is that when I’ve studied past analyst revisions data, the Street is as influenced by the market action and direction far more than you’d think (in my opinion). Analysts and strategists seem as cowed today as at any point in the last 10 years since—given the flat returns of the last 18 months and after the horrific drop in crude oil and commodity prices—so many Street prognosticators have to be thinking “why stick my neck out on a bullish forecast for an earnings or revenue estimate,” which is exactly why I remain bullish.
The reason a premium is placed on the “forward 4-quarter” dollar estimate is because it is a leading indicator for a data set that is more coincident or lagging in nature.
Conclusion: While the Street is tilted otherwise, I do think the S&P 500 will eventually break out above the 2,130-2,150 ceiling within which it is contained. The S&P 500 is working on 18 straight months of a 0%-1% return, which is maybe why hedge funds are getting push-back on the 2% / 20% fee structure. The S&P 500 is looking at its third straight year of $118-$119 in dollar earnings (per share) and this too will likely break higher.
Coming into the year I thought the S&P 500 would return 10% and the sector overweights were Technology and Financials. Financials were hammered in Q1 ’16, but have subsequently bounced and Technology has been hammered in Q2 ’16 (now becoming oversold), but I’m sticking with these positions. The sentiment data continues to be encouraging from a contrarian perspective. The Presidential election and the associated rhetoric is a strange wildcard that is tough to quantify.