S&P 500 Earnings Update: SP 500's Earnings Yield Hits A 2022 High

Brian Gilmartin, CFA profile picture
Brian Gilmartin, CFA
9.24K Followers

Summary

  • The stock market in 2022 has been all about “P/E compression”, since the S&P 500 has deteriorated at a faster rate than S&P 500 earnings.
  • Today, only Tesla might have the biggest disparity between its market cap weight and earnings weight within the S&P 500.
  • The other disparity that’s becoming clearer is “US vs. non-US”.
  • The technical setup of the stock market got worse today, which isn’t good.

S&P 500 Exchange Traded Fund Investment Asset Stock Market Money

Just_Super/iStock via Getty Images

Because Nike (NKE) and Micron (MU) reported Thursday, September 29th, after the market close, those companies and the subsequent earnings and revenue revisions are not in the current IBES data by Refinitiv reports until next week, so the data shown is as of Thursday, September 29th and any impact on the aggregate estimates won’t be known until early next week.

S&P 500 data

  • The forward 4-quarter estimate (FFQE) declined $0.25 this week to $230.43 from last week’s $230.68. Of the last 14 weeks, since July 1 ’22, the S&P 500’s FFQE has declined sequentially 13 of those 14 weeks.
  • The P/E ratio as of 9/30/22 was 15.5x versus 16x last week, the same as when the quarter started.
  • The S&P 500 earnings yield ended this week at 6.43%, moving one basis point ahead of 2022’s high EY of 6.42% as of June 17, ’22.
  • Since July 1 ’22, the FFQE has declined about $10 in total from $240 and change to $230 and change as of 9/30/22.

The S&P 500 earnings yield didn’t really get above 5% until the 2nd week of January ’22 and it has stayed above since. In December ’18, the S&P 500 earnings yield hit 7% just before Powell started making dovish comments about monetary policy in the last week of December ’18 and then early ’19. In that 4th quarter of 2018, the S&P 500 P/E slid from 17x to 14x the forward 4-quarter estimate, and the estimate itself remained stable at $168 per share from late September ’18 through the last week of December ’18.

The stock market in 2022 has been all about “PE compression”, since the S&P 500 has deteriorated at a faster rate than S&P 500 earnings.

Market Cap vs. Earnings Weight: Top 10 Names in the S&P 500

  • Apple (AAPL): 7% market cap weight
  • Microsoft (MSFT): 5.77% market cap weight
  • Amazon (AMZN): 3.32% market cap weight
  • Tesla (TSLA): 2.33% market cap weight
  • Alphabet (GOOG, GOOGL): 3.61% market cap weight
  • Berkshire (BRK.A, BRK.B): 1.58% market cap weight
  • United Health (OTCPK:UEEC): 1.55% market cap weight
  • Johnson & Johnson (JNJ): 1.41% market cap weight
  • Exxon Mobil (XOM): 1.20% market cap weight

Top 10 Earnings weights

  • Apple: 4.2% earnings weight
  • Microsoft: 3.7% earnings weight
  • Exxon Mobil: 3.1% earnings weight
  • Chevron (CVX): 1.8% earnings weight
  • JPMorgan (JPM): 1.8% earnings weight
  • Pfizer (PFE): 1.8% earnings weight
  • Alphabet: 1.6% earnings weight
  • Johnson & Johnson: 1.4%
  • AbbVie (ABBV): 1.4% “
  • Berkshire Hathaway: 1.3% “
(Earnings weight detail courtesy of Refinitiv.)

The Top 10 market cap names comprise 27-28% of the S&P 500 index as of Thursday, September 29, 2022, while the top 10 earnings weights comprise about 20% of the S&P 500 index.

Summary / conclusion

A long-time friend reached out the past week and asked me about S&P 500 earnings and what the next few months looks like (I laughed and told him, “Why not ask me something difficult?”). He is a long-time bond-fund manager mainly of intermediate high-grade and high-yield corporate bonds, and his thinking was that this leg down in the S&P 500 since January 3rd, 2022, was all interest-rate driven, while the next leg down for the S&P 500 would probably be earnings driven, and I couldn’t disagree.

The S&P 500 at the peak in March 2000 saw “technology” as 33% of the S&P 500’s market cap, while the commensurate “earnings weight” of that concentration was just 13%, while today, only Tesla might have the biggest disparity between its market cap weight and earnings weight within the S&P 500. That’s one big difference today.

The other disparity that’s becoming clearer is “US vs. non-US”.

Look at FedEx (FDX) and Nike (NKE), both enormous global brands with wide-reaching distribution and supply networks and both stocks are down 50% or more on earnings. A contributing factor to non-US stocks in the next quarter will be the incredible strength in the US dollar and what that means in terms of “translation” for revenue and earnings.

More work needs to be done on the sectors but two sectors with heavy US concentrations that could have little overseas exposure are regional US banks and utilities, as well as domestic REITs.

That’s too broad a brush with too little detail but it gives readers some ideas.

Frankly, I’m worried about S&P 500 earnings, but as long as the top 10 market cap weights don’t disappoint, the S&P 500 will probably be fine.

On the last day of the quarter today, September 30, 2022, the S&P 500 finally cracked its June 16th low of 3,636 and closed at 3,584.62. The PCE data this morning was still stronger-than-expected, and yesterday’s jobless claims number fell back below 200k. Both indicate strength where investors would like to see slowing.

The technical setup of the stock market got worse today, which isn’t good.


Take all of the above with a healthy dose of salt. IBES data by Refinitiv is the source of all earnings data. None of this is a recommendation to buy, hold or sell anything. Past performance is no guarantee of future results. Capital markets can and do change quickly for better and worse.

Original Post

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

This article was written by

Brian Gilmartin, CFA profile picture
9.24K Followers
Brian Gilmartin, is a portfolio manager at Trinity Asset Management, a firm he founded in May, 1995, catering to individual investors and institutions that werent getting the attention and service deserved, from larger firms. Brian started in the business as a fixed-income / credit analyst, with a Chicago broker-dealer, and then worked at Stein Roe & Farnham in Chicago, from 1992 - 1995, before striking out on his own and managing equity and balanced accounts for clients. Brian has a BSBA (Finance) from Xavier University, Cincinnati, Ohio, (1982) and an MBA (Finance) from Loyola University, Chicago, January, 1985. The CFA was awarded in 1994. Brian has been fortunate enough to write for the TheStreet.com from 2000 to 2012, and then the WallStreet AllStars from August 2011, to Spring, 2012. Brian also wrote for Minyanville.com, and has been quoted in numerous publications including the Wall Street Journal.

Additional disclosure: Copyright © 2022 Fundamentalis

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