Per Thomson Reuter’s “This Week in Earnings” the forward 4-quarter estimate for the S&P 500 actually increased this week to $123.19, up from last week’s $122.77.
The P/E ratio on the forward estimate is now 15.3(x), and the PEG ratio as of Friday, May 2nd, 2014 is 1.86(x).
The earnings yield on the S&P 500 is 6.55%.
Most importantly, the year-over-year (y/y) growth rate is 8.21%, which exceeds the previous highs of 8.02% in late December ’13, and is now the highest y/y growth rate since January, 2012.
Commentary/Analysis: A number of metrics this week show the S&P 500 at a valuation that remains quite reasonable, almost attractive if you look at the 1.86(x) PEG (P.E-to-Growth) ratio, and the y/y growth rate in earnings. The 1.86(x) PEG hasn’t been this low (consistently) since the first quarter of 2012, so we need to see if this continues for a few weeks or months. The increase in the y/y growth rate for the S&P 500 is very important, but it also needs to be sustained if the S&P 500 should gain traction here.
There was a nice jump in earnings this past week. While the pattern of lower revisions, then higher revisions once earnings start, continues, I took a look at the full-year 2014 earnings growth estimates in this spreadsheet:here
Note the very robust change in the Healthcare sector. Note only have the earnings growth estimate revisions been higher in April and through early May, but the full-year 2014 earnings growth estimate for full-year 2014, is now HIGHER than on Jan 1, 2014. That is a very unusual, and out-of-the-ordinary pattern for estimate trends, and bodes positively for the sector.
The other sector is Technology: we wrote about that here last week on this blog, and continue to think the sector is attractive. Our tech sector exposure is split between “old” low-valuation Tech, and some racier, high-valuation Technology, like Facebook (NASDAQ:FB). Sure Apple Inc (NASDAQ:AAPL) was a huge boost for the sector given AAPL is 3% of the S&P 500 and 13% of the QQQ, and the largest position in both indices, but even Twitter (NYSE:TWTR) saw its forward estimates revised higher after its poorly received earnings report. (Long FB, AAPL, TWTR.)
Healthcare and Technology are roughly 13% and 19% of the S&P 500 when weighted by market cap. While the Telco estimate revisions also bode well for the Telco sector, my issue with the sector is that it now consists of just 5 companies, and along with Ute’s and Basic Materials, comprises just 3% of the S&P 500 each by market cap weighting.
Our original Q1 ’14 earnings growth estimate was for 3% – 5% y/y S&P 500 earnings growth when the majority of companies had reported Q1 ’14 earnings by mid-June, 2014. We wrote in this article as late as yesterday, here, (using last week’s data) that 2014 full-year earnings growth has been reigned in from an expected 10% originally to 7.5% as of last week. I may have to revise yesterday’s conclusions already. Q1 ’14 could come in better than 5% growth, and full-year 2014 earnings revisions, driven by Healthcare and Technology could be very positive for the S&P 500 earnings as a whole. (The fact is the S&P 500 isn’t seeing any P/E expansion, which is hindering portfolio managers and traders I would think.)
We saw a nice jump in the forward growth rate this week to 8.2%. This is all good. While faster S&P 500 earnings growth doesn’t always translate into a strong stock market, like the old analogy about the fastest man winning the foot-race, it sure is a good way to bet.
We’ll be out with more detail on the Healthcare sector and estimate revisions this coming week.