5% S&P 500 Earnings Growth The Norm Right Now

The “forward 4-quarter earnings estimate” for the S&P 500 slipped to $113.22 last week, from $113.38 the week prior, as the S&P 500 rose 0.78% over the last five trading days.

The forward P/E ratio is now 14.5(x).

The “earnings yield” of the S&P 500 using the foward estimate is now 6.89%.

Year-over-year growth in the forward estimate ticked up again to 4.73%.

Few S&P 500 companies report this week, and very few reported last week. 494 of the S&P 500 companies have now reported Q1 ’13 results, with first quarter, 2013 earnings growing 5.0%, while revenues were flat year-over-year.

Stat of the week:

We track year-over-year growth of the forward estimate of the S&P 500, and it has begun to grow once again. Market movements don’t correlate precisely with earnings, but I’ve always felt that the forward estimate needs to grow for the market P/E to expand, or at least to provide a framework for P/E expansion.

6/7/13: $113.22 +4.49%

5/31/13: $113.38 +4.20%

5/24/31: $113.43 +4.13%

5/17/13: $113.56 +4.04%

5/10/13: $113.57 +3.73%

5/3/13: $113.84 +3.79%

4/5/13: $115.25 +5.19%

3/1/13: $112.39 +6.10%

2/2/13: $112.47 +5.86%

1/4/13: $113.88 +5.45%

11/30/12: $109.42 +4.67%

10/26/12: $111.14 +5.54%

9/28/12: $107.89 +3.20%

8/31/12: $108.02 +1.92%

8/3/12: $108.23 +1.08%

The progression of the above numbers shows the date of the estimate, the forward estimate itself, and then the y/y growth versus the forward estimate 52 weeks prior.

The bottom of the year-over-year earnings growth of the forward estimate of the S&P 500 off the March, 2009 market low occurred on August 3rd, 2012, when the estimate reached its growth nadir of 1.08%. It accelerated again through early March ’13, took a pause and has now turned higher.

The key week will be when the forward estimate growth rate succeeds the old high of 6.10% from March 1 ’13.

We’ve been growing on a year-over-year basis since then, albeit at a less-than-robust 5% rate the last two quarters.

Earnings growth rates for S&P 500 (estimated and historical)

Q4 ’13: +12.1% (current estimate)

Q3 ’13: +8.2% (current estimate)

Q2 ’13: +2.8% ( current estimate)

Q1 ’13: +5.0 (494 of 500 reported)

Q4 ’12: +6.3%

Q3 ’12: 0.1%

Q2 ’12: +8.4%

Q1 ’12: +8.1% (Ex Apple, thought to be closer to 3%)

Q4 ’11: +9.2%

Q3 ’11: +18%

Q2 ’11: +12.1%

Q1 ’11: +18.9%

My guess is we will do at least 5% in 2013 in terms of S&P 500 earnings growth, but possibly as much as 10% as we head into the 2nd half of 2013, based on the easy compares versus last year. Split the difference, assume 7.5% earnings growth and the S&P 500 looks fairly valued at 14(x) forward estimates. However…

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We think it more likely that S&P 500 earnings will slowly gain strength as late 2013 becomes early 2014, based on a strong US consumer, Europe stabilizing, and Japan improving.

It sure looks like we have settled into a 5% – 6% earnings growth routine. Anything stronger, upwards towards 10%, and the S&P 500 P/E can expand further.

Remember, a 10% growth rate in S&P 500 earnings, means a 20(x) P/E ratio, which leaves the S&P 500 looking fairly valued.

We left a number of links out ofInteresting article pulled from Josh Brown’s blog on the 10 things economists won’t tell you. #6 or #7 is the most important one, i.e. both political parties “data mine” to support their desired policies. Economists are as human as you and I. Their biases and political leanings come out in their forecasts. Politics is economics and economics is politics. I think it was Peter Lynch who once said that if you spend 5 minutes studying economics relative to your portfolio and investing strategy, you’ve wasted 5 minutes. Not sure I agree with that completely, but I have found it interesting that – over my 25 years in the business – I’ve never seen a quote from a Fidelity economist.

Per the above, S&P 500 earnings growth seems mired around the 5% range the last two quarters, and the forward growth estimate is near 5%. We need to see a higher growth rate to push the S&P 500 higher. I think it happens later this year.

Written By: Brian Gilmartin