With the roll into the April '17 quarter, the forward 4-quarter estimate has increased from last week's $130.98 to this week's $135.14.
The forward 4-quarter estimate now covers the period from Q2 '17 through Q1 '18, while the Street obsesses over Q1 '17 S&P 500 earnings, which start this week.
Last week's S&P 500 action was worth noting given that investors saw relatively weak March '17 auto sales to start the week, a robust ADP and weekly jobless claims number indicating labor market strength on Wednesday and Thursday, only to be followed by a very weak Bureau of Labor Statistics report on Friday morning, which was then followed by a sell-off in Treasuries (i.e. lower prices and higher yields), completely opposite to everything that might logically be expected. Oh yeah, and the US military launched a missile strike against Syria Thursday night, sending Dow futures down 155 points in overnight trading, only to be flat to slightly positive Friday morning, pre-payroll report.
If you slept through the entire week, the S&P 500 lost 7 points, and the 10-year Treasury yield fell two points from 2.40 to 2.38%, while those of us watching the action were white-knuckling the events.
Q1 '17 Earnings start this week: (Thomson Reuters I/B/E/S data by the numbers)
- Forward 4-quarter estimate: now $135.14, with the quarterly roll
- PE ratio: 17.4(x)
- PEG ratio: 2.10(x)
- S&P 500 earnings yield: 5.74% vs last week's 5.54%
- Year-over-year growth of the forward estimate: fell back to +8.3% with the quarterly bump vs the +8.96% (multi-year high) from two weeks ago.
Financials kick off this week with JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) reporting Thursday morning pre-open. Two other reports of note are Delta Air Lines (NYSE:DAL) on Wednesday and Taiwan Semiconductor (NYSE:TSM). The airlines are a critical component of the Transport Index and the semiconductor group has been on fire the last 10-12 months, and some technicians are looking for a consolidation of the out-sized run the semi group has had. (Long JPM, IYT)
The Financial sector and Q1 '17 earnings merit a longer post but I will say that the big banks and the SIFIs (Strategically Important Financial Institutions) really suffered in the 8 years after the Fall, 2008 Mortgage/Financial/Banking Crisis. You could see it in the tracking of the revenue growth estimates for the like of JPMorgan, Wells Fargo, Bank of America, etc. which were steadily and consistently downward after CCAR (Comprehensive Capital Analysis and Review) and the likes of Living Wills and other such regulatory issues basically turned the major Financials into public utilities.
While I suspect Dodd-Frank won't be completely repealed (nor should it be), I do suspect that some of the onerous regulation and oversight will dissipate under the new Administration and Congress and what investors need to pay attention to in terms of whether the Financial sector can provide some "alpha" to investors is whether revenue growth for the big banks and brokers can improve for 2017 and 2018.
It's just an opinion, but revenue growth for Financials is more important than earnings (or EPS) growth today.
However, this topic merits a longer post.
Analysis / conclusion: Thomson Reuters I/B/E/S is looking for 10% S&P 500 earnings growth for Q1 '17. Factset is looking for 8% growth as detailed by John Butters and John noted in his Friday missive that the historical pattern for S&P 500 earnings is that "actual" reported earnings tend to exceed "estimated, expected" S&P 500 earnings growth by 4.1%.
Thus if Thomson is expecting 10% S&P 500 earnings growth at the start of the quarter, then given the historical pattern, "actual" growth should come in between 13% and 14% and if Factset is expecting 8% estimated S&P 500 earnings growth for Q1 '17, then actual should be between 11% and 12%. This historical pattern was written about this week on the blog and Seeking Alpha, and received the typical snarky responses by the uninformed that can so-often populate public investment forums.
Combining or averaging Thomson and Factset's "expected" Q1 '17 S&P 500 earnings growth: 9% growth is expected as of today, and assuming we get the 3%-5% upside seen every quarter, final Q1 '17 earnings growth should be between 12% and 14%.
Remember though, this is against easy Q1 '16 comp's and the collapse of crude oil and commodity prices in Q1 '16.
Our sector overweights for clients remain Technology, Financials and Energy into Q1 '17 earnings.
Technology sector (price action) was strong in calendar Q1 '17 while Financials and Energy were weaker from January 1 '17 through March 31 '17.
Health Care is being added to slowly (a 15% market cap weighting in the S&P 500), mainly biotech via the IBB, but the IBB and Russell 2000 seem to be closely correlated so if small caps lag in '17, then the IBB might be less robust as well.)
Thanks for reading - definitely another post has to follow tomorrow.