S&P 500 Earnings Update: Big Jump In Forward Estimate - Quite Unusual

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Includes: BXUB, BXUC, EPS, IVV, LLSP, RSP, RWL, RYARX, SDS, SFLA, SH, SPLX, SPUU, SPXL, SPXS, SPXU, SPY, SSO, UPRO, VFINX, VOO
by: Brian Gilmartin, CFA

Thomson Reuters is rechecking the data, but this past week readers of the Thomson Reuters' "This Week in Earnings" report will see another increase in the forward 4-quarter estimate, which is unusual given the historical pattern. Here is the forward 4-quarter estimate for the last 4 weeks:

  • 4/15/16: $126.08
  • 4/8/16: $124.78
  • 4/1/16: $123.50
  • 3/25/16: $120.14

The "forward 4-quarter estimate" now covers the period from Q2 '16 through Q1 '17. What the forward estimate does is allow investors to better track the forward P/E ratio of the S&P 500, since most investors are currently using either the 2016 full-year EPS P/E or the 2017 full-year EPS P/E. (Think about it this way, in June or July of every calendar year, do you look at the P/E for the calendar year to end in 6 months or 19 months? The forward 4-quarter estimate gives readers the rolling P/E on a constant time horizon.)

However, here is the unusual aspect to the above data: normally, as we roll into each new quarter, there is a $3-$4 "bump" or increase in the forward estimate as we saw on April 8, 2016. However, the pattern has been that subsequent weeks typically then see small downward revisions each week to the forward estimate, particularly in the post-2009 era, and particularly since crude oil peaked in Q3 '14.

However, note for the week of 4/15/16 that the $126.08 forward estimate is a sequential increase of 1% - that is pretty unusual.

Even talking about Q1 '17's numbers would not be worth the effort, until after mid-July 2016 when we start to see Q2 '16 numbers, but readers need to note that Q1 '17 will be post the Presidential election, and that could make a difference.

I've asked T/R to verify the underlying data comprising the "forward 4-quarter" estimate, but the point of this discussion is that 1.) there is either an erroneous data point in the estimates, or 2.) the Street is suddenly looking for faster earnings growth starting in Q1 '17.

Judgment will be withheld for now.

Earnings data (by the numbers):

  • Forward 4-quarter estimate: $126.08 vs. last week's $124.78
  • P/E ratio: 16.5(x)
  • PEG ratio: 7.87(x)
  • S&P 500 earnings yield: 6.06%
  • Year-over-year growth rate of the forward estimate: +2.10%, the highest since January 30, 2015 (almost 15 months ago)

Analysis/conclusion: Q1 '16 Energy sector earnings "growth" is expected at -107.5%. My guess is the 2017 estimates are starting to incorporate a more stable crude oil price and Energy sector earnings growth. Readers and investors will start getting Energy sector data this week with Schlumberger (NYSE:SLB) on Thursday night, April 21, 2016. (No positions). The Doha meeting will captivate traders both tonight (Sunday, 4/17) and the first few days of the week, but I'll be looking at earnings data for the real meat in terms of the sector direction.

Financials, the other sector thought to be the key to this market, is seeing some slightly better earnings revisions to Q2 '16, but the Financial sector growth estimates for Q3 and Q4 '16 are still headed lower, which is normal.

While Financials were the focus last week, I think it's Old Tech this week with IBM (NYSE:IBM), Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) on deck. All three companies have or are in the middle of completely re-making their business model. Not an easy thing to do. (Long all 3 names, MSFT is largest position of 3.)

The one thing this S&P 500 has been missing for a while is decent earnings growth. The strongest rate of growth we've seen is 2011's 15%, and that was probably a function of the rebound in 2010.

Remember, only 35 companies have reported Q1 '16 results so far. We hear from another 100 companies this week.

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