Can S&P 500 Finally Break The Downtrend Line Off The Sept. '18 Peak?

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by: Brian Gilmartin, CFA
Summary

Trading back above the downtrend line will be the second major test after the S&P 500 recovered its 50-day moving average near 2,600.

The Technology sector's expected earnings growth rates continue to be weak and revised lower, even as Microsoft is set to report its fiscal Q2 '19 earnings this coming week.

The Tech sector continues to be a major downward pull for the S&P 500's expected 2019 earnings growth as of today.

S&P 500 daily chart as of 1/25/19

Trading back above the downtrend line will be the second major test after the S&P 500 recovered its 50-day moving average near 2,600.

The government shutdown likely took the Fed/FOMC off the table for a while in terms of the US economy, although the last December '18 jobs report of +312,000 net new jobs created and last week's jobless claims number under 200,000 for the first time since the late 1960s indicate the labor market is strong. However, there is just no inflation, wage or commodity. Pretty amazing 10 years into an economic recovery.

S&P 500 Earnings data (Source: I/B/E/S by Refinitiv)

  • Fwd 4-qtr est: $170.01 vs. $170.98
  • PE ratio: 15.6x
  • PEG ratio: 3x
  • S&P 500 earnings yield: 6.38% vs. last week's 6.40%
  • Year-over-year growth of fwd est: +4.9% vs. last week's +5.5%

The Technology sector's expected earnings growth rates continue to be weak and revised lower, even as Microsoft (NASDAQ:MSFT) is set to report its fiscal Q2 '19 earnings this coming week. Microsoft could be the "ying" to Apple's (NASDAQ:AAPL) "yang" this quarter, since Microsoft has overtaken Apple as the #1 stock by market cap weight in the S&P 500.

Here is how the Tech sector's expected earnings growth rates look over the next four quarters:

  • Q4 '19: +9.2%
  • Q3 '19: -1%
  • Q2 '19: -2.3%
  • Q1 '19: -2.2%
  • Q4 '18: +8.9%

It's obvious the I/B/E/S data is looking for a weak 2019 for Tech, with the exception of Q4 '19, although we have to give it a few weeks to see if the fourth-quarter expectations hold up after Microsoft, Apple and such.

Apple is a big influence on these numbers and it's clear this will be a transition year for the iPhone and Tech Hardware the next few quarters.

The Tech sector continues to be a major downward pull for the S&P 500's expected 2019 earnings growth as of today. Microsoft's report this week could definitely help the sector.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.