The S&P 500 as well as many other equity indices finished at all-time highs this past week, breaking out of 8-week consolidations, as corporate earnings are coming in OK, but not “shoot-the-lights-out” great.
Sometimes, that is all that is needed.
Per ThomsonReuters, “This Week in Earnings”, the “forward 4-quarter” estimate for the S&P 500 estimate finished the week at $118.75, down $0.19 from last week.
TheP/E ratio on the forward estimate is 14.7(x). The 10-year average P/E ratio (per Factset) is 14(x), so if you hear the financial media gasbags telling you “the market” is expensive and overvalued, tell ‘em right back that the S&P 500′s P/E ratio is right in line with its 10-year average. This makes total sense since the S&P 500 just made a new all-time high in March and May ’13, after a 13-year consolidation, interrupted with two vicious bear markets.
That being said, the S&P 500 is up 22% YTD, while the S&P 500′s expected earnings growth is just 5% for 2013, and 11% for 2014.
The earnings yield on the S&P 500 is now 6.81%.
The y/y growth rate of the forward estimate slipped to 6.19%, which is down from last week’s 6.34%, and down from the mid-September peak of 7.30%.
Frankly, I’m a little surprised that we have gotten a solid, technical breakout on the S&P 500 to an all-time high, without the y/y growth rate breaking above 7% – 8%. I would like to see that y/y growth rate on the forward estimate start to work higher.
This coming week, we hear from another 144 companies in the S&P 500, so by the end of next week (10/25/13), about half the S&P 500 will have reported.
3rd Quarter ’13 Earnings Detail
Q3 ’13 earnings are now expected to grow 2.1% per ThomsonReuters with revenues expeceted to grow 2.1%. The big “shock” to Q3 ’13 earnings was the JP Morgan (JPM) charge which dropped the Financial sector’s expected Q3 ’13 earnings growth from 8.6% last week, to -1.2% this week. Per Factset, JPM is not only the largest detractor for the Financial sector, but the S&P 500 as well. Also per Factset, if JPM’s litigation charge is excluded from Q3 ’13 results, the y/y earnings growth rate for the sector would improve to 14% from October 1st’s initial estimate of +9.4%.
Over this past weekend, there was talk on the wires that JPM was negotiating a $14 bl settlement for all of its outstanding issues with the Justice Department. This charge will undoutedly impact Q4 ’13 earnings growth for the sector which is currently expected at +24.5%.
JPM has 3.7 billion shares outstanding as of the Sept 30, ’13 quarter. The non-cash litigation charge to clear the decks for JPM would be $10.21 per share approximately, and I’m guessing it would wipe out Financial sector earnings for Q4 ’13.
We would buy JPM on weakness today, or on the settlement headline.
We did (and would) add to JPM, Goldman Sachs (GS), Schwab (SCHW), CME, Morgan Stanley (MS) and Bank of America (BAC) into the Q4 ’13 earnings reports which start in mid-January ’14.
The breakout in the indices this week, and the stable action in Treasuries portends favorable capital market results for Q4 ’13, regardless of litigation charges.
Stay with Financials, the worst is being put behind us.
4th quarter ’13 Earnings Detail
Last week we noted that only Industrials had seen expected y/y earnings growth ratchet higher for Q4 ’13, in the week of October ’11 versus the week of October 1.
Because of Honeywell International's, (HON) results and likely a few others, Industrial earnings growth has now been revised lower than its October 1 estimate.
Utilities are the only sector showing higher expected growth for Q4 ’13 relative to October 1.
2014 Expected S&P 500 earnings growth
Personally, it may be a little early to make firm predictions / conclusions about the S&P 500 2014 earnings growth, but we started noticing the stability in Financial sector estimates for 2013 in October 2012, and note that currently, 2014 estimates per ThomsonReuters have been relatively stable:
- 10/18/13 +11.8%
- 10/11/13 +11.5%
- 10/1/13 +11%
- 7/1/13 +13%
From what I’ve learned about analyst modeling habits the last 20 years, analysts are starting to hone in and tweak their 2014 EPS models for individual companies, although the vast majority of S&P 500 components won’t give “hard” guidance on 2014 until the January – February conference calls, and given the state of the US economy, that guidance will likely be conservative at best. The 3rd week of January ’14 and the full-year earnings growth rate for the S&P 500 at that point should be telling.
To conclude, 2014 S&P earnings growth could come in stronger than 2013′s expected 5% – 7% growth, but that doesn’t mean that the S&P 500 will be up more than the S&P 500′s 2013 return.
Excluding JPM’s Q3 ’13 litigation charge, Factset says that the S&P 500′s Q3 ’13 earnings growth would be +3.8% versus Factset’s original estimate of +3.2%. Translating that into ThomsonReuters estimates, that would imply a +5% – 6% Q3 ’13 earnings growth estimate as of October 18, using the ThomsonReuters ratio, given that ThomsonReuetrs started the quarter on October 1, ’13 expecting +4.6% growth.
We own Freeport (FCX), US Steel (X) and Alcoa (AA), within the Basic Materials sector which is 3% of the S&P 500. Earnings look like they are bottoming for the sector. Chemical companies make up about 70% of the Basic Materials sector.
Consumer Discretionary continues to lead the 10 S&P 500 sectors for expected 2014 earnings growth at +18.9%. This sector has been a top performer all year. No other sector comes close – the next closest growth rate is Industrials at +10% for 2014.
Very surprised with Friday’s breakout in the broad stock market indices, that Treasury yields stayed quiet and well bid. A trade down to 2.50% this year on the 10-year and we’d be out for the added duration of the last few weeks.