S&P 500 Weekly Earnings Update: Apple's Market Cap And Earnings Weight Will Have Investors' Attention This Week

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by: Brian Gilmartin, CFA

Last week, we noted the continued increase in the "forward 4-quarter estimate" which was unusual given the typical pattern, and in fact Thomson re-checked the data and found the estimate was not accurate, but the error wasn't material. Last week's $126.08 forward estimate (initially) was revised to $124.83 or what was about a 1% overstatement of the forward estimate.

Here is this week's new data per Thomson Reuters and "by the numbers":

  • Forward 4-quarter estimate: $124.78 versus last week's corrected $124.83 was less of a revision lower this week than is typical
  • PE ratio: 16.76(x)
  • PEG ratio: 9.25(x), and still very distorted
  • S&P 500 earnings yield: 5.97%
  • Year-over-year growth rate of the forward estimate: +1.81% versus last week's revised 1.09%. This is the 3rd week in a row the "growth rate' of the forward estimate has now risen, and the 15th of the last 16 weeks that it has increased, BUT we need to see the growth rate start to improve at a faster rate.

Q1 '16 Earnings - how do they look?

So far, with 132 companies having reported Q1 '16 financial results, 77% of the 132 companies have beat the consensus estimate, while 58% of the companies have beaten the consensus revenue estimate. Thomson notes that Q1 '16 earnings are +4.4% above consensus, and Thomson also notes that "it is likely that Q1 2016's earnings growth rate will substantially improve by the end of this earnings season".

Trinity's expectation for Q1 '16 earnings "ex-Energy" was low-single-digits year-over-year earnings growth, and that certainly looks achievable today.

Ex-Energy, per both Thomson and FactSet, S&P 500 earnings growth for Q1 '16 -3.5% versus the -8.9% expected originally (including Energy).

Apple earnings - did iPhone shipments bottom in fiscal Q1 '16?

The big report that will get beaten to death on the fat box this week is Apple's (NASDAQ:AAPL) fiscal Q2 '16 earnings release, which was pushed back a day to Tuesday, April 26th, 2016 after the closing bell, due to the death of Bill Campbell.

Apple is 3.2% of the S&P 500 by market cap, but closer to 5%-6% of the S&P 500 by earnings weight. That is a big chunk of the S&P 500.

Looking at the estimates and how they have progressed over the last 90 days, Apple's revenue estimates for fiscal '16 have come down sharply, and the expected 2016 revenue growth rate for Apple has come down from +5% to -3% coming into Tuesday's release. After the January '16 report, it was read from one analyst that he thought iPhone shipments had bottomed with the Q1 '16 financial release. The revenue revisions might indicate otherwise.

Last April '15, or almost exactly one year ago, this blog article was posted prior to Apple April '15 earnings release. Technically, looking at the chart, Apple put in a pretty clear "top" in the mid $130's in 2015.

Is Apple's decade-long run over? Could Apple now be just another busted growth stock? I thought I heard or read this past week that Apple was the worst performing Dow 30 stock year-to-date but Apple closed 2015 right at $105 per share and that is where the stock closed Friday, April 22nd, 2016, and the S&P 500 is flat to +1% on the year, so holding Apple year-to-date hasn't hurt investors much from a relative performance perspective too much. iPhone shipments met unit estimates for Q1 '16, but the iPad numbers continue to languish.

Apple valuation:

Current consensus estimates per Thomson indicate that over the next 3 fiscal years - fiscal '16 through '18 - Apple is expected to grow EPS 6% and revenue 3%.

Trading at 3(x) cash-flow (ex cash) and 4(x) free-cash-flow (ex cash) and roughly 11(x) forward earnings, Apple is dirt-cheap on a valuation basis, but so were so many of the busted "tech" growth stocks from the 1990's that had no answer when Schumpeter's creative destruction came calling.

While clients' current Apple position is roughly 1.9% today versus last April '15's 4%, barring anything unusual on Tuesday night, the company deserves the benefit of the doubt here.

The US tax code, and Apple's $215 bl in cash held overseas as of 12/31/15, and the strength of the US dollar is distorting so much of the S&P 500

Apple is still a "retail investor" darling, but Apple may be just another consumer staple: great brand, great product, great dividend, with low single-digit growth.

A $585 billion market cap makes for a tough needle to move.

Summary/conclusion: By the end of this coming week, about half the S&P 500 will have reported Q1 '16 results. We also hear from Exxon (NYSE:XOM) and Chevron (NYSE:CVX) Friday, April 29th, which could be more critical than Apple. (Long Apple and XOM). Q1 '16 earnings are coming in better-than-expected which isn't unusual, however, we get to hear from a lot more Energy companies over the next two weeks. I will be watching the full-year 2016 expected Energy sector earnings growth. That y/y growth rate of the S&P 500 forward estimate needs to start to push higher for the S&P 500 to push to all-time highs.

The headwinds that have been squashing the market the last two years (like sitting on a beach ball in a pool), i.e. Energy and Basic Materials earnings, plus the strong dollar, look to be ebbing.