The addition of Tesla (NASDAQ:TSLA) (TSLA this past week to the S&P 500 index has lowered S&P 500 estimates and raised the benchmark’s P/E, all of which was eloquently explained by David Aurelio of Refinitiv last week, in anticipation of Tesla joining the index. Here was last’s week post with the attached article from David, but here is the paragraph that sums up the influence of Tesla’s addition to the benchmark on S&P 500 EPS and revenue:
The addition of Tesla to the S&P 500 will result in a reduction to EPS, due to Tesla’s high market cap to earnings ratio. For example, TSLA’s price to 2021 earnings is 161.3. The index is expected to see 2021 earnings fall 1.3% to $168.84 per share. Earnings for the consumer discretionary sector are forecasted to increase 1.1% to $13.33 per share and there is an anticipated 23.5% increase to $1.72 per share for the automobiles industry. As a consequence of these reductions to earnings, price to 2021 earnings will increase 1.4% to 22.2 for the index, 10.7% to 35.1 for the sector, and 410.3% to 38.7 for the industry.
Exhibit 3: Y/Y Growth Rates for the S&P 500 with Current Constituents vs. Tesla Inclusion vs. Tesla
S&P 500 data:
- The forward 4-quarter estimate of $159.01 was roughly $2 lower versus last week’s $161.17
- The PE ratio on the forward estimate rose to 23.3 vs last week’s 23.0.
- The S&P 500 Earnings yield fell to 4.29% vs last week’s 4.34%.
- The average S&P 500 EPS growth rate of calendar 2020 and 2021 is now 3% versus the 4% of the last several months.
Financial sector update:
Last Friday night, December 18th, 2020, the big news was that the Fed would start allowing the banks and brokerage companies to repurchase their own stock again.
Here’s an updated spreadsheet with “expected” Financial sector EPS and revenue growth estimates through Q3 ’21:
The two left-hand columns are expected full-year calendar 2020 and 2021 EPS growth rates for the Financial sector.
The five columns to the right are the same Financial sector EPS broken down by quarter.
The rapid improvement in Q3 ’20 (now fully reported) was mostly due to credit losses coming in far better than what the big banks had reserved for or were expecting.
Readers may not fully see the impact of the increased share repurchase until January ’21 since many banks will likely announce their share repurchase intentions with Q4 ’20 financial results and full-year 2021 guidance.
S&P 500 forward eps curve:
The attached “forward EPS curve” for the S&P 500 took a little whack this past week with the Tesla addition.
Let’s see how the data unfolds over the next few weeks.
Summary
Analyst revisions have slowed for now, but they will start to pick up after January 4th, 2021 when the Street returns and analysts start to update their December ’20 numbers after talking to the coverage (i.e. the companies they follow).
Bullish sentiment is so prevalent now it is worrisome. I don’t have any particular 2021 insight that readers haven’t heard already, but the bullish sentiment is forcing me to become somewhat less excited.