July 2016 was a good month for the S&P 500, with the main benchmark rising 3%-4%.
The Technology sector led the way, rising roughly 7%.
S&P 500 Earnings Data (by the numbers, courtesy of Thomson Reuters):
- Forward 4-quarter SP 500 earnings estimate: $126.52, versus $126.45 last week.
- P/E ratio: 17.2(x)
- PEG ratio: 13.2(x)
- S&P 500 earnings yield: 5.83%, vs 5.81% last week.
- Year-over-year growth rate of the forward estimate: +1.30%, still disappointingly low in terms of the growth rate. Crude oil and Energy estimates fell sharply in Q3 '15 last year so the compare is getting easier.
Analysis: The one sentence that jumped out while reviewing all the S&P 500 earnings commentary from Thomson, FactSet and Bespoke this morning was FactSet's comment on page 2 of their "Earnings Insight": "…the smallest drop in S&P 500 EPS estimate for Q3 '16 to date since Q2 '14". (FactSet made a similar comment in early June 2016).
Because the progression of revisions is typically negative for "forward" quarters, what FactSet is seeing is that Q3 '16, which would normally be seeing sharply negative EPS revisions following Q2 '16 results, is seeing less onerous revisions. Per FactSet, "This marks the smallest decrease in the bottom-up EPS estimate over the first month of a quarter since Q2 2014".
Here are the numbers per FactSet:
- 4-qtr average: -2.7% decline
- 20-qtr average: -2.3% decline
- 40-qtr average: -2.3% decline
The point being that the Q3 '16 decline for the S&P 500 EPS estimate has been just -0.7%.
That is telling readers that Street analysts are becoming less negative about future quarters.
Conclusion: This is pretty "wonky", navel-gazing and highly technical stuff for readers, but the simple conclusion that readers should take away from the blog post today is that:
- Forward earnings for the S&P 500 are EXPECTED to improve.
- The typical negative revisions seen around forward quarters at this time are in fact "less negative", indicating that analysts are becoming more optimistic about forward earnings.
- It is highly likely that the S&P 500 will follow those better earnings expectations and trade higher by year-end 2016.
The S&P 500 was up 6%-7% year-to-date as of Friday, July 29, 2016. Here was this blog's forecast for 2016 S&P 500 return expectations as of December 2015.
My biggest worry is the bond market, particularly interest rates. Even with new all-time highs in the S&P 500, fund flow data show people leaving the stock market and putting money into bond funds, which is truly amazing. Talk about chasing returns…
I've been wrong for 7 years, but I can't help but think how interest rates, the bond market and bond market asset classes end very badly.