Long-Term Growth Estimates At Sensational Highs

Summary

• Forward earnings growth is running hot (thanks to a spike in upward revisions driven by the tax cuts).
• Trailing earnings are plodding along, following a recovery from the 2015/16 earnings recession.
• Long-term growth estimates have spiked to the highest levels seen since the dotcom boom.

Here's the second installment of the new "What the EPS?" series, where I look at earnings trends across sectors, countries, regions... taking my usual top-down approach. This week, we look at earnings trends for the S&P 500 (SPY), specifically the path of forward earnings (up sharply), trailing earnings (up slowly), and estimates of long-term future earnings growth (up sensationally*).

The key points on the S&P 500 earnings outlook are:

- Forward earnings growth is running hot (thanks to a spike in upward revisions driven by the tax cuts).

- Trailing earnings are plodding along, following a recovery from the 2015/16 earnings recession.

- Long-term growth estimates have spiked to the highest levels seen since the dotcom boom.

1. Forward vs. Trailing Earnings Growth: This is an important chart for anyone who cares about the S&P 500. It shows the pace of growth in forward earnings (consensus estimates of the next 12 months earnings) vs. trailing earnings (actual earnings over the last 12 months). The obvious standout is the surge in forward earnings (thanks to tax cuts), the less obvious standout is the earnings recession in 2015/16, and relatively lackluster pace of earnings growth thereafter - no signs of overheating there! (yet)

2. Consensus Long-Term Earnings Growth: The next chart shows a rather interesting indicator I found as I sifted through the dozens of series on Thomson Reuters Datastream termed "Weighted Average Long Term Growth Forecast". As you might guess, this is the weighted average long-term expected earnings growth rate for the S&P 500. The chart below provides an interesting, if cautionary, look at this indicator across time... compare and contrast the peak of the dotcom boom vs. the depths of the global financial crisis. Something tells me this one might be more of a sentiment indicator than anything! Still, what a turnaround from the lows of 2016.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.