S&P 500 Valuation Still Reasonable: S&P 500 Earnings Yield Was 6.59% Last Week

by: Brian Gilmartin, CFA

S&P The one stat that jumped out at me from this blog's earnings update this weekend weekend was the S&P 500 Earnings Yield at 6.59%, the highest print for that metric since the 2nd week of October, 2014 or the bottom of the 2014 correction.

Earnings Matter, and Q4 '15 Starts Tonight with Alcoa

John Butters was responsible for Thomson Reuters "This Week in Earnings" prior to jumping ship to FactSet a few years ago to get their S&P 500 earnings analysis up to speed. John's recent articles on how the decline in Q4 '15's earnings estimate was "normal" for the quarter is linked here. I tried to link to it with this weekend's earnings post without success. Start with pp 2-3.

This "normal" deterioration in the Q$ '15 estimate should bode well for earnings season.


  • From Bespoke's research piece today on earnings season:

Notably, the S&P has recently performed horribly during earnings off-seasons, while it has performed extremely well during earnings seasons. Above is a table and below is a chart showing the S&P's performance during earnings seasons and off-seasons over the last year. As shown, the index has fallen during every off-season, with returns getting worse each time. During earnings seasons, though, the index has rallied more than 2% each time. The average change for the S&P during off-seasons over the last year has been -2.81%, while the average change during earnings seasons has been 2.71%. Also, since 2001, when the S&P has been down during the prior earnings off-season (as it certainly has been this off-season), the S&P has averaged a gain of 0.91% during the ensuing earnings season. When the S&P has been up during the prior earnings off-season, the index has averaged a smaller gain of +0.54% during the following earnings season.

The fact that the S&P 500 cannot muster any kind of a rally is disheartening, but this is how bottoms are formed. The S&P 500 lows from August 24th and 25th now come into play: 1,867 is the cash lows for the August correction, and futures lows per Bob Lang (@aztecs99) are 1831.

Last night's overnight low for the index was 1,900, from what I saw. Another close for the S&P 500 and Nasdaq at the lows tonight wouldn't be good.

It is very discouraging that the S&P 500 turned south before the old S&P 500 highs at 2,132-2,135.

Valuation discussion:

Dr. David Kelly of J.P. Morgan runs the conference call for J.P. Morgan's "Guide to the Markets", and it is some of the best fundamental work anywhere.

Last week, on the conference call, on p. 5 of the Guide, Dr. David Kelly put up the following slide:

S&P 500 Valuation measures: JPMGTTMSP500Valmeasures

Readers should note that the S&P 500's key metrics remain well within historical norms.

I tend to focus on cash flow, and 11(x) is saltier than I'd like, but is nowhere close to the late 1990s 15(x) we saw, for what were considered moderately valued companies.


Hard to say if Alcoa (NYSE:AA) can have any beneficial impact on the S&P 500. Intel (NASDAQ:INTC) and JPMorgan (NYSE:JPM) (long both) report Thursday, and they may be the better tells. By the end of the week, we will have heard from the big banks, Intel and CSX Corp. (NYSE:CSX). Not enough company or sector breadth, but the one positive to hearing the banks first is that we will likely get updates on Energy credits and Energy geographies, as well as corporate loan growth, which was starting to improve. By the end of next week's results, we'll see if guidance is materially different than the Street's expectations.

In terms of the economic data, we seem to be in a very weird economy: how do we reconcile 290,000 monthly job creation and record auto sales with a punk stock market? Commodity prices are just not that big of a percentage within the S&P 500 - Basic Materials is 3% of the index, and a lot of this is Chemicals. The Services sector is 80% of the US economy, and that is still expanding slowly, but 290,000 jobs?

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