At a CFA Chicago lunch about a week ago, Charlie Evans, Head Fed-head at the Chicago Federal Reserve here in the Windy (and balmy) City, talked about how the Fed plans to shrink the $4.5 trillion Fed balance sheet down to $1.5 trillion in the next few years. His most telling comment was that, if the Treasury yield curve remains positively sloped, the Fed will likely just let the mortgages mature and roll off on their own. If the Fed thinks the yield curve is too flat, then they will actively sell mortgages/other securities at the longer end. Sounded to me like the Fed-heads want a positively-sloped curve and higher rates on the long-end.
Until the 10-year Treasury closes below 2.3% on good volume, my bet is still interest rates are headed higher. (Long TBF)
It has been 28 months since the "forward 4-quarter growth" rate for the S&P 500 has reached the 8% level.
Q4 '16 earnings season has been pretty decent according to most pundits, but what they haven't told you is that we haven't had a "normal" earnings season since - probably - Q2 '14, or shortly before crude oil fell apart.
More and more bloggers/tweeter's, etc. are starting to cover S&P 500 earnings, which I think is good for readers, but you always need to look at the data through an historical eye (in my opinion) or at least with some detached perspective.
- Thomson Reuters I/B/E/S data (by the numbers as of 2/24/17):
- Forward 4-quarter estimate: $131.43 vs last week's $131.39
- P.E ratio: 18(x)
- PEG ratio: 2(x)
- S&P 500 earnings yield: 5.55% vs last week's 5.59%
- Year-over-year growth rate of forward estimate: +8.41% vs last week's +7.93%, and a 24 month high for the key metric.
As today's headline indicates. the key metric this week is that the "forward 4-quarter" expected S&P 500 earnings growth rate over the next 12 months is 8.41% or the highest since late October '14.
The Energy sector was the biggest influence on the benchmark in the time since, exerting an enormous drag on the benchmark's earnings growth.
The plan is to be out with an earnings-related article on both Saturday and Sunday this weekend, so tonight's will be brief.
For perspective, during the late 1990's Technology sector earnings typically grew every quarter, y/y, between 30% - 40%, even when the sector was between 20% - 30% of the S&P 500. Today, the Tech sector is still just 20%-21% of the S&P 500 by market cap, well below its Spring, 2000 peak of 33%.
The point is that with a potential rebound in Financial revenue growth, we could see the first "normal" string of earning's quarters in 2017, in about 3-4 years, and probably a faster rate than we've seen since the 2008 Financial Crisis.
However let's watch the revisions i.e. the deterioration (if there is any) in the forward quarterly estimates. That is the best tell I've found in 17 years of tracking this data.
8.5% earnings growth for the S&P 500 is in line with 2nd half of the 20th Century's long-run historical earnings growth rate.
You could make the case, post the Tech crash and post the 2008 Financial collapse, we are just now getting back to "normal" S&P 500 earnings growth.
Thanks for reading - more to come in the next few days.