CNBC’s Fast Money had Tom Lee on Thursday night, who I think is an outstanding strategist, and while it was a puzzling interview (Tom was positive on all the sector that were the heaviest weights in the S&P 500 like Technology, Health Care, Industrial’s, etc.), but Tom was also negative on the market for the 2nd half of the year.
Tom must be looking for some “P.E compressing event” to occur, which is always difficult to predict since by its nature it’s an “exogenous shock,” which implies that earnings growth will be fine, but something will happen to cause the market to correct and thus compress the P.E ratio on the S&P 500.
A good example of this kind of event was Q1 ’16: the commodity bust, and Emerging Markets both bottomed in Q1 ’16, the Energy sector reported a net income loss for the entire sector in Q1 ’16, and it dragged down everything in its way, including Technology (Amazon (NASDAQ:AMZN) corrected from $700 the first week of January ’16 to $470 by the first week of February or losing roughly 35% of its market value in 5 weeks) on what was the end of the commodity selloff. (L AMZN, overweight Tech).
My point is, I don’t see in S&P 500 earnings what has Tom worried. In fact, I think the 2nd half of ’17 could be stronger than the first half in terms of the S&P 500 return, as it looks like we will get healthcare reform needed for reconciliation in 2018, (too late for 2017), from which we can infer we could get tax cuts and some tax-friendly legislation by late summer.
Can the Republican Congress get their freakin’ act together and actually cut capital gains taxes and marginal tax rates for the average American?
In fact, the pattern of the forward S&P 500 earnings estimates (as was pointed out last week) indicates that S&P 500 earnings are actually gaining strength, even with a new Energy drag. (The rationale is to show readers different data sets from different angles on earnings, which are all telling the same story.)
Here is the “CY 2017” S&P 500 estimated full-year earnings growth trend per Thomson Reuters I/B/E/S.
- 6/23/17: +11.4%
- 6/16/17: +11.6%
- 6/9/17: +11.6%
- 6/2/17: +11.7%
- 4/1/17: +10.9%
Instead of the typical “growth decay” we see for forward estimates, forward estimates have remained stable or even risen a little.
Even John Butters of Factset publishes an occasional “Insight” blurb about these trends – this is “atypical” action for the earnings data, and it typically portends stronger SP 500 earnings ahead.
Unless something surfaces in Q2 ’17 earnings, and the trading action of the semiconductor sector since June 8th is a yellow light right now, my best “guesstimate/forecast/opinion” of both S&P 500 earnings and the expected return for the benchmark into 2h ’17, is that we could still see gradual “P.E expansion”.
This blog’s forecast made in Mid-December ’16 for 2017’s S&P 500 estimated market return still stands. It’s been a pretty orderly rally.
Thomson Reuters Data (by the numbers):
- Fwd 4-qtr estimate: $134.72 vs l;ast week’s $134.66 (sequentially higher versus the typical decline)
- P.E ratio: 18(x)
- PEG ratio: 1.9(x)
- S&P 500 earnings yield: 5.53% (has been stuck under 5.60% for 5 weeks)
- Year-over-year growth of forward estimate: ticked up to 9.56% from last week’s 9.27% – a move over 10% would be a big deal)