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SPY: The S&P 500 Will Be Increasingly Reliant On Revenue Growth


  • Revenue and earnings estimates are fairly high in the face of a global economic slowdown.
  • Profit margins are at a cyclical high and a secular high suggesting the ability to pull profit levels may be limited.
  • The S&P 500 will be increasingly reliant on generating top-line revenue growth to meet elevated EPS estimates.
  • Earnings growth in the US is likely to fall well short of what is priced into the market over the next 12-18 months.
  • This idea was discussed in more depth with members of my private investing community, EPB Macro Research. Start your free trial today »

SPY: The S&P 500 Will Be Increasingly Reliant On Revenue Growth

As the S&P 500 has moved higher over the past six weeks with the SPDR S&P 500 ETF (NYSEARCA:SPY) rallying more than 16% off the low set on Christmas Eve, nearly all fear has come out of the market and the sense of optimism is back, despite the lack of a change in underlying growth fundamentals. What is currently priced into the market today in terms of revenue growth and EPS growth for the S&P 500 and, thus the SPY ETF, is far too optimistic for the current environment, and has the potential to lead to a fairly rapid contraction in EPS estimates.

With profit margins at a cyclical and secular high, something that was recently discussed in the member chatroom of my marketplace service, EPB Macro Research, the ability for companies to pull profit levers on decelerating revenue growth is diminished, creating an environment where the S&P 500 companies that comprise SPY will be increasingly reliant on companies delivering on the top line.

What is currently priced into the equity market is highly optimistic based on the global growth outlook. The results through 2019 and 2020 have a high probability of falling short relative to expectations.

In an interview with Business Insider, Bob Prince, Co-CIO of Bridgewater Associates, the world's largest hedge fund, said that "earnings in the US are likely to underperform what is priced in." Below we will take a look at why Bridgewater is forecasting a sharp reduction in earnings growth relative to what is priced in, and what that may mean for the market and SPY as a whole.

The estimates for SPY earnings per share based on the S&P 500 have been coming down in recent weeks as the global slowdown continues to

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This article was written by

Eric Basmajian profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.

Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives. 

Eric holds a Bachelor’s degree in economics from New York University.

EPB Macro Research offers premium economic cycle research on Seeking Alpha. 

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Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I have an underweight allocation to SPY

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