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S&P 500: Forward Estimate Growth Rate Continues Higher

By Brian GilmartinStock MarketsAug 12, 2013 12:26AM ET
S&P 500: Forward Estimate Growth Rate Continues Higher
By Brian Gilmartin   |  Aug 12, 2013 12:26AM ET
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Q2 ’13 earnings are thought to officially conclude this week, with Wal-Mart’s (WMT) fiscal Q2 ’14 financial results due out before the bell on Thursday morning, August 15th. As of Friday, roughly 450 of the S&P 500 have reported Q2 ’13 earnings, with y/y growth of 4.5% for the S&P 500 earnings and y/y revenue growth of 2.1%.

Per ThomsonReuter’s ‘This Week in Earnings” the forward 4-quarter estimate of $115.95 this past week was just a penny lower than last week’s $115.96.

The P/E ratio as of Friday’s close on the forward estimate was 14.6(x).

The earnings yield on the S&P 500 using the forward estimate is now 6.86%.

More importantly, the y/y growth of the forward estimate is now 7.19%.

Here is a quick summary of the y/y growth rate of the “forward 4-quarter S&P 500 estimate” as of Friday, the 2nd of August, going back to Jan 1, ’13:

  • 8/9/13: +7.19%
  • 7/12/13: +4.41%
  • 6/14/13: +5.06%
  • 5/10/13: +3.88%
  • 4/12/13: +5.27%
  • 3/8/13: +6.01%
  • 2/8/13: +6.28%
  • 1/11/13: +6.02%
(We measure the percentage change based on this week’s “forward 4-quarter” estimate, versus the same forward estimate 52 weeks prior. In this week’s case, we are measuring the $115.95 against the 8/10/12 forward estimate of $108.17.)

Based on the expansion of the forward 4-quarter growth rate, we remain bullishly biased, but truth be told, the S&P 500 earnings data is lapping very easy comps from the back half of 2012. For example, the above forward 4-quarter estimate of $108.17 in the last sentence was just a 1.28% y/y growth rate, from the August, 2011 estimate. The S&P 500 bottomed in early June last year after the nasty correction in May ’12, fully 60 days before the S&P 500 forward growth rate bottomed.

As always, the market itself is your best leading indicator.

This is where I also think most “earnings watchers” get it wrong: they are constantly monitoring current earnings, revisions, beat rates, etc., and yet very few discuss that uber-critical, “Forward 4-quarter” growth rate, and its trend. Only Ed Yardeni and Jeff Miller give any kind of freight to this indicator.

Bottom line: little has changed from an earnings standpoint, and while S&P 500 earnings and revenues aren’t screaming positives, they aren’t negative either as was the case last year as the forward growth rate was slowing.

Here are our assumptions (or predictions) into year-end, ’13:

We will see either the 3rd or 4th quarter of 2013 generate 10% y/y earnings growth for S&P 500 (most likely the 4th quarter), although the Q3 ’12 compare is just 0%;

The 4th quarter of ’13 will be very strong, led by Financials (as usual). Current Q4 ’13 earnings growth estimates for Financials are looking for a whopping 26% y/y growth rate in Q4 ’13. Stay long Financials.

Sector discussion:

As of August 9th, Q2 ’13 earnings per ThomsonReuters, have grown 4.5% on 2.1% revenue growth. Factset says that Q2 ’13 earnings have grown +2.1%. (I’m trying to work out the discrepancy now with the various reporting services, including Thomson, Factset, and Zacks. When we started this in 2000, we went with Thomson given that FirstCall was the gold standard for tracking analyst numbers. Factset and John Butters are giving T/R a run for their money…)

Telecom: the most oversold of all 10 S&P 500 sectors, which isn’t saying much given that 80% of the S&P 500 is considered overbought. We would only be long Verizon (VZ) and AT&T (T). VZ is closer to fully oversold than T, in terms of trendline support. We’d buy VZ at $47 and T closer to $31.

Basic Materials: Looking for a sleeper sector? How about a thoroughly trashed sub-sector? Freeport (FCX), US Steel (X) and Alcoa (AA) were up 8.25%, 8% and 3.14% this week respectively. My buddy and fellow XU alumnus, Ryan Detrick, from Schaeffer’s Investment Research, thinks Gold (GLD) is due for a bounce. Here is the chart Ryan uses to lay out his case for a bounce in gold. (Long FCX, AA, X)

The Materials Select SPDR ETF (XLB) closed this week a dime ahead of its 2-year high from early 2011 at $41.28. Let’s see if it gets some game this coming week. The XLB’s top two holdings are Monsanto (MON) and Du Pont (DD), so keep that in mind. (Long XLB)

Right now, I’m partial to the pure non-gold mining plays, i.e. FCX, AA, X. The China data this past week was one fundamental catalyst for the sector, (maybe). The Basic Mat sector earnings trends have changed very little.

Consumer Discretionary and Healthcare are two top performing sectors so far in 2013. We bought a little Intuitive Surgical (ISRG) this week, with the stock down from $500 – $510 in January, to its trading range between $375 – $390 currently. We like ISRG for a trade here, possibly up to pre-announcement level between $405 and $428. (Long ISRG)

Good Tweets / Articles we found this week, along with additional thoughts:

Gary Morrow, a former CME currency trader and now hedge-fund manager in San Luis Obispo, California, thinks the Treasury complex is putting in “a slow bottom”. I respectfully disagree. This link was pulled off Josh Brown’s blog (@ReformedBroker) and is an article from Jim O’Shaughnessy. Note Figures 2 & 4. Our blog post from the day prior to July payroll data is here, making the same prediction.

In 2006 – 2007, Gary Morrow made a great call on TheStreet.com noting the bottom forming in Treasuries, (despite a 93% bearish reading in JP Morgan’s bond manager survey), a Treasury condition which Greenspan shortly thereafter called “The Conundrum”. I do think it is different this time, and that Treasuries will break multi-year yield resistance (and price support) by year-end 2013 (maybe sooner) and start to breakdown to levels that reflect “normal relationships” between asset classes and inflation.

The reason I think it is different this time:

1.) The recovery in Japan and also Europe should eventually stimulate faster global growth,

2.) I do think the Fed actually wants a little inflation, over and above the consistent 1.5% core PCE rate we’ve seen for the last few years. A little “demand-pull” inflation would be a positive in the Fed’s eyes in my opinion;

3.) Remember, the Treasury rally in ’06 – ’07 was the best leading indicator and foreshadowed the pending financial system crisis in 2008. Personally, and this is just my opinion, we don't have that worry currently. The “risk” today is that there is better US and global growth than is currently factored into expectations;

4.) The fourth and weakest reason is that – if you re-read Jim Shaughnessy’s piece – all bull markets come to an end, and the Treasury rally certainly qualifies as a bull market. (Gary is an old friend, and contributes technical commentary to this blog. Next time he is in Chicago, it will be time for a cage match between the two of us, called “Treasury Showdown”.)

The Treasury complex will break eventually. Even with weak equity markets this week, the best the the 10-year Treasury could rally is from 2.60% to 2.58%.

We’d sell our iShares Barclays 7-10 Year Treasury Bond ETF (IEF) and iShares Barclays 20+ Year Treasury Bond ETF (TLT) (small position bought for a bounce, three weeks ago) with any re-test of 2.39% – 2.40% in the 10-Year.

A great blog post from Josh Brown (@ReformedBroker) answering the question, “Are Stocks Expensive?” Using BAML research, this is a great valuation table.

Will the Fed Taper begin in September ’13? @Soberlook thinks so. Interesting point about the Treasury supply being reduced thanks to shrinking deficit. Could be bullish for Treasuries, EXCEPT, the expanding deficit and Treasury issuance sure didn’t cause yields to rise since 2008, did they?

Here is our blog post from Thursday on the attraction of Microsoft (MSFT) and Freeport (FCX) as true value plays. MSFT and that daunting cash hoard, not to mention its substantial free-cash-flow generation, I think is really taking the shareholders for granted. MSFT missed the internet in the mid 1990s, (almost, until IE got them in regulatory trouble), MSFT missed the tectonic shift to consumer tech after the late 1990s secular growth in corporate technology, and MSFT missed the secular transition to today’s Big 3 in terms of Mobile, Social and the Cloud. Why does Ballmer still have a job?

MSFT has $77 billion in cash on the balance sheet, and is generating an excess of between $3 and $5 bl in free-cash-flow per quarter. The $77 bl represents almost $9 per share. Wow. ValueAct is an activist hedge fund that now has a position in the stock. Hopefully they can get this Board and management team in gear…

Japan: not acting as we had hoped, but still long the DXJ and EWJ. Here is Yra Harris’ blog (Yra is a CME trader and frequent Rick Santelli and CNBC guest) on the Japanese predicament. Still long and wrong on the Rising Sun, but I do think Abe and Kuroda will get this done. Watching how the Yen responds to a trade to the low 90′s. Should bounce from there. The Yen needs to weaken in my opinion, to send the Nikkei higher, and the Japanese government bond market lower.

Asset Allocation Update:
We remain tilted towards equities more heavily in the standard 60% / 40% asset allocation benchmarket portfolio, given the flat 13-year return on the S&P 500 (either in nominal or inflation-adjusted return basis) and underweight fixed-income given the 40-year bull market in Treasuries and the risk-reward in terms of bond market yields. We have some direct Japan exposure via ETFs, but prefer US large-cap and the S&P 500 / 100 as the most-attractively valued asset class today.

Our primary equity overweight remains the Financial sector, although we are warming up to the beaten-down Basic Materials sector. We added to our Basic Mat weighting this week, by buying FCX. Our three primary overweights are Financials, Technology and Industrials. Basic Materials is just 3% of the S&P 500 by market cap. It probably wouldn’t get to be more than 5% – 6% of client exposure under the best of circumstances.

We are in the process of selling all of our fixed-income mutual funds, and will trade ETFs, CEFs, and individual bonds for fixed-income exposure going forward. We are overweight credit-risk given the improving US economy and the robustness of US corporate cash-flow.

The S&P 500 remains seriously overbought, but that has mattered little. We are constantly looking for oversold names that can weather bad earnings news, and look to be trading around long-term support. Names like Caterpiller (CAT), Deere (DE), Intuitive Surgical (ISRG) qualify as beaten down, oversold names. Deere reports this week. The global Agriculture business remains in good shape, but DE has lagged the S&P 500 this year by quite a bit. We would be a serious buyer of DE near $75, the 200 week moving average. (Long ISRG)

Wal-Mart (WMT) reports Thursday morning, August 15th before the opening bell. In our opinion, at a $500 billion annual run rate in revenues, there is no better real-time indicator for the consumer today, and consumption is 2/3rd’s of the US economy.
S&P 500: Forward Estimate Growth Rate Continues Higher
S&P 500: Forward Estimate Growth Rate Continues Higher

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