A Longer Look At S&P 500 Earnings: P/E Expansion Vs. P/E Contraction

by: Brian Gilmartin, CFA

The bullet points show historical and projected S&P 500 dollar estimates and growth rates from 2011 through 2017.

  • 2017 est: $142.82 or +12% y/y EPS growth
  • 2016 est: $126.91 or +8%
  • 2015 est: $117.26 or -1%
  • 2014 actual: $118.78 or +8%
  • 2013 actual $109.68 or +6%
  • 2012 actual: $103.80 or +6%
  • 2011 actual: $97.82 or +15%
  • The S&P 500 dollar figure as provided above in each bullet point are Thomson Reuters operating EPS for that calendar year, either the current estimate for 2015 through 2017 or the actual EPS print for 2011 through 2014.

So what is this data telling readers? 2011 was a year where the S&P 500 corrected over 20% from its early May '11 high to its October '11 low, but S&P 500 earnings grew 15% in 2011.

In 2013, the S&P 500 returned 32% for the full year and yet S&P 500 EPS growth was just 6%. In 2013, there were still write-offs occurring in the banking sector so that has distorted much of the S&P 500 earnings data for the last few years, as least through 2014 anyway. There were seemingly fewer, higher-profile, headline-grabbing bank write-offs in 2015.

In 2015, with another full quarter of S&P 500 earnings still left to report, the dollar EPS figure should come in flat to slightly positive for 2015, which means that for the first time in many years, the S&P 500's return roughly approximated the earnings growth rate of the index.

Here might be another way of analyzing the same data:

2015: A year of neither P/E expansion nor P/E contraction (still awaiting Q4 '15 earnings)

2014: A year of milder P/E expansion i.e. 8% S&P 500 earnings growth versus a 13.7% total return on the S&P 500

2013: A year of (substantial) "P/E expansion"

2012: A year of "P/E expansion"

2011: A year of "P/E contraction"

And yet another way of looking at this would be this Excel spreadsheet: FCSP500longtermdata. The years in heavy border reflect calendar years where S&P 500 earnings grew more than the return on the S&P 500 benchmark. Since 1985, 12 of the 31 years through 2015 have seen "P/E contraction".

4 of those 12 years saw a negative return on the S&P 500 for that calendar year.

So what is the point of all this?

Investors haven't seen a year of decent P/E contraction since 2011. I can see why so much of the Street has such low expectations for 2016.

Analysis/conclusion: Per Ryan Detrick, since 1960, for every year that the S&P 500 has been flat in terms of the total return for that calendar year, the following year is higher for an "average" return of 19%. Frankly, all of these "stats" leave me thoroughly confused.

I'm still trying to lean against the apathy and pessimism of Wall Street about the S&P 500 for 2016.

  • "Everyone" hates Energy and yet WTI has not made a substantial new low below the August-September '15 lows - that is a 4-5 month base being formed.
  • "Everyone" hates the Emerging Markets and yet the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) and the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) have also not made a substantial new low in the last 4-5 months.
  • "Everyone" really hates Brazil, the unholy confluence of Energy, commodities, socialism, and inept incompetence at the highest levels of office, and yet the iShares MSCI Brazil Capped ETF (NYSEARCA:EWZ) hasn't traded below its September '15 low (but it's close).
  • "Everyone" thinks the dollar index is headed higher, but it has been locked in the 98-100 range for several months now as well.

Given today's sentiment and malaise, I am still confident about 2016, but guidance on the January '16 conference calls will mean quite a bit.

Disclosure: I am/we are long EEM, VWO, XLE, IYE EWZ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.