S&P 500 Weekly Earnings Update: Can The S&P 500 Make An All-Time High Off Of Q2 2016 Earnings?

| About: SPDR S&P (SPY)

And that is the $64,000 question.

The S&P 500 stopped inches short of the record close from May 21, 2016 of 2,130.82.

The first 6 months of 2016 have seen a powerful recovery in commodity prices, which should alleviate the substantial drag on S&P 500 earnings from the Energy and Basic Materials sectors, both sectors combined comprising roughly 10% of the S&P 500 by market cap.

Alcoa (NYSE:AA), JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) all report this week, which is par for the course so the Street and investors will get a good look at how the big banks and Financials like BlackRock (NYSE:BLK) performed in Q2.

Q2 '16 Expected Earnings Growth by Sector:

  • Consumer Discretionary: +8.8%
  • Health Care +4.3%
  • Industrials: +3.1%
  • Utilities: +1.6%
  • Telecom: -1.0%
  • Consumer Staples: -1.2%
  • Financials: -5.7%
  • Technology: -6%
  • Basic Materials -10%
  • Energy: -78.2%
  • S&P 500: -4.8%

Source: Thomson Reuters

Q2 '16 Expected Revenue Growth by Sector:

  • Telecom: +10.9%
  • Health Care: +7.9%
  • Consumer Discretionary: +5.0%
  • Utilities +5.0%
  • Consumer Staples: +1.8%
  • Financials: +0.2%
  • Industrials: -1.3%
  • Technology: -4.9%
  • Basic Materials: -5.0%
  • Energy: -25.9%
  • S&P 500: -1.0%

Source: Thomson Reuters

Thomson Reuters Weekly Earnings Data (by the numbers):

  • Forward 4-Quarter estimate: $127.04 vs. last week's $122.76 (The "quarterly roll" occurred this week as the new forward 4-Quarter period is now Q3 '16 - Q2 '17)
  • P/E ratio: 16.77(x)
  • PEG ratio: 14.6(x)
  • S&P 500 earnings yield: 5.96%. Despite the rally in the S&P 500 this week, the quarterly roll in the forward 4-quarter estimate lifted the yield from 5.84% to 5.96%
  • Year-over-year growth of the forward estimate: +1.15% (would have preferred to see +3%-4% growth, but not yet).

Analysis/conclusion: Many pundits talk about the 2-3 quarters of consecutive negative earnings growth for the S&P 500 but fewer talk about the revenue growth: even though the Street has seen 3 consecutive quarters of negative earnings growth from the S&P 500, investors have seen 5 straight quarters of negative revenue growth. In Q1 and Q2 '15, revenue growth was negative, but overall EPS growth for the S&P 500 was positive.

Here are the numbers: Actual EPS and Revenue growth for S&P 500

Q3 '14: +10.3% EPS growth and +4.1% revenue growth

Q4 '14: +7% EPS growth and +2.1% revenue growth

Q1 '15: +2.2% EPS growth and -3.1% revenue growth

Q2 '15: +1.3% EPS growth and -3.4% revenue growth

Q3 '15: -0.08% EPS growth and -4.3% revenue growth

Q4 '15: -2.9% EPS growth and -3.5% revenue growth

Q1 '16: -5% EPS growth and -1.7% revenue growth

Estimated:

Q2 '16: -4.8% EPS growth and -1% revenue growth

To answer the headline question, a lot depends on what the estimates do for Q4 '16 and 2017 with the Q2 '16 earnings report.

While stocks move on upside/downside surprises, it is the "voting machine vs. weighing machine" analogy: there is definitely a forward-looking component to stock prices (a statement that should be no surprise to anyone).

If we get stronger-than-expected revenue growth from the S&P 500, particularly from Energy and Basic Materials, and most importantly Technology, look for the S&P 500 to break to an all-time high.

I'll say right here on this blog, Energy sector revenue has bottomed with Q4 '15, as has Basic Materials, which means the worst is in for earnings declines too.

I do think these two sectors will provide some surprises to Q2 '16 earnings as noted a few weeks ago.

More to come Sunday, July 10th.