S&P 500's P/E Rises To 16.4x As Q1 Results Start Coming In

| About: SPDR S&P (SPY)

Every week I review key statistics for the S&P 500 (NYSEARCA:SPY) and look under the surface at the companies with the most impact on the index. Last week, the S&P 500 rallied 2.3% and expanded its LTM P/E multiple to 16.4x (operating earnings). Analysts forecast Q1 operating earnings of $25.49, up $0.04 from the previous week. Expectations are high and we will soon find out if Q1 earnings provide support for the S&P 500's move. In this article I look at the S&P 500's P/E and earnings expectations from a few angles and then focus on the top 100 companies, including revisions to analyst estimates for their Q1 earnings.

S&P 500 Price Action

Yesterday I discussed 4 key drivers for the S&P 500. Please see Market Update: Are Key Indicators Supporting The S&P 500 Rally?

In this article I will drill down on one of those factors: S&P 500 earnings.

(Source: Standard & Poor's)

Q1 2013 Results So Far

Earnings season is just beginning and 31 S&P 500 components reported so far: 18 beat estimates, nine missed and four were in-line.

S&P 500 P/E Multiple & Earnings Estimates

There are several ways to look at the P/E of the S&P 500, including trailing/forward earnings or operating/reported earnings. Here is a look from different angles.

Earnings estimates for Q1 2013 were up slightly last week. Importantly, analysts are expecting growth in Q1 earnings after a few quarters of flat/down results.

The P/E multiple for the S&P 500 is not high by historic standards (first graph), but is higher than what we have been used to over the last few years (second graph).

Please note that the last datapoints in the third and fourth graphs are estimates and will change as the numbers come in. The graphs show the expectations for growth, but it is too early to tell what the actual results will be.

Focus On The Top 100 In The S&P 500

The top 100 companies represent 64.4% of the value of the SPY ETF (there are slight differences between the weightings of SPY ETF and the S&P 500, but they are basically the same). The iShares S&P 100 Index ETF (NYSEARCA:OEF) also tracks these companies

Below are four charts about the top 100 companies in the S&P 500: (1) 5-day price change, (2) forward P/E multiples, (3) analysis of companies with FY1 P/E multiples lower or higher than the median for the group and (4) changes in analyst estimates for FQ1 over the last 7 and 30 days.

There are a lot of data in these charts, so I want to highlight some of the leaders and laggards and a few takeaways.

In terms of price performance, the healthcare stocks continue to lead, especially Gilead (NASDAQ:GILD) and Biogen (NASDAQ:BIIB). These companies also have some of the highest P/E multiples on the S&P 500. Year-to-date, Gilead is up 41% and Biogen is up 61%. I missed the rally so far in these stocks, and the healthcare sector more broadly, but this performance is a clear indicator to start doing homework on the space.

Hewlett-Packard (NYSE:HPQ) was the big loser last week. IDC reduced its Q1 2013 forecast for PC sales, which hit the whole sector, but Hewlett-Packard's stock price suffered the most over this time frame. It will be interesting to see how Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and some other companies in the PC ecosystem react going forward.

Ford also had a good week. Last weekend, I wrote Is Ford's 13% Pullback A Good Entry Point? and please see the article for my perspective on the company.

In addition to healthcare stocks, the defensive, consumer staples names are trading at high P/E multiples relative to the group. Some examples are: Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO) and Pepsico (NYSE:PEP). These stocks may continue to have high relative P/E multiples and strong performance, but it would be much healthier for the market if the cyclicals start to catch up.

Exxon Mobil (NYSE:XOM) has underperformed the market so far this year, with a gain of only 2.8%. However, there has been a clear trend of positive EPS revisions:

(Source: Yahoo Finance)

The trend in earnings estimates for EOG Resources (NYSE:EOG) is also interesting. Estimates were cut in the last quarter, but have been inching back up:

(Source: Yahoo Finance)

I have been increasing my exposure to the energy sector, though I don't have exposure to either of these stocks. The price of natural gas has been rising over the last few months up to $4.22 /MMBTu and I am looking for more opportunities that have natural gas exposure.

There are some energy companies with falling energy estimates, including Occidental Petroleum (NYSE:OXY).

Finally, there were a lot of cuts to Microsoft's earnings estimates this week in response to the IDC forecast discussed above.

(Source: Yahoo Finance, see further notes below)


The S&P 500 is rallying to new highs with an elevated P/E multiple and high expectations for earnings. Under the surface, the defensive sectors, like healthcare and consumer staples have been leading.

Last week we saw further evidence of weakness in the tech space with Hewlett-Packard's poor performance and the cuts to Microsoft's estimates. The rally in the S&P 500 seems to need a rotation of leading sectors for another big move higher. I am not sure that we will see tech take the lead now.

The materials sector has also been weak, but it is interesting to watch the energy space. Natural gas prices have been strong and oil has been stable, with WTI crude bouncing around the $90s for most of the quarter. I have been adding exposure to energy and it will be watching for more opportunities if the commodity prices hold up.


The tables exclude the following: P/E multiples greater than 100 and P/E less Median values greater than 50. Additionally, some information about Amazon, Berkshire Hathaway, AbbVie, Mondelez and Abbott Laboratories was not available.

The mean and median figures presented in this article represent the unweighted mean and median of the metrics for the 100 components in the SPDR S&P 500 ETF Trust and are not capitalization-weighted like the index itself.

Earnings Estimates are based on data from Yahoo Finance as of April 12, 2013.


The opinions expressed above should not be construed as investment advice. This article is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product.

Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this article should be interpreted to state or imply that past results are an indication of future performance.


Disclosure: I am long F, WMT, GOOG, ORCL, BAC, AIG, SBUX, DE, GS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the securities mentioned in this article at any time, including in the next 72 hours.

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