Q2, 2013: Earnings Growth Should Be Decent at +5% – 7%

Per ThomsonReuter’s, “This Week in Earnings”, the “forward 4-quarter estimate” for the S&P 500 earnings is now $113.14, down $0.16 from last week’s $113.30.

The P/E ratio on the forward estimate is now 14(x).

The “earnings yield” remains over 7% closing at 7.04% as of Friday, June 28th. (If you wonder why “earnings yield” matters, compare the 7.04% S&P 500 earnings yield to the 2.5% yield on the 10-year Treasury, and think “Fed Model”.)

The year-over-year growth of the forward estimate continued to tick higher at 5.21%

This coming week, when we get turn the calendar into July, the “forward 4-quarter” estimate should jump to the $117 – $118 neighborhood. Each quarter, as we end the current quarter and lap into the next quarter, and given the upward bias to the forward estimate, we see a $3 – $4 increase in the forward estimate. Here is the historical pattern looking back 15 months:

June 28, ’13/ July 5, ’13: $113.14 and ? 14(x) and ?

Mar 29 ’13/ Apr 5, ’13: $111.84 and $115.25; 14(x) and 14(x)

Dec 28 ’12/ Jan 4 ’13: $108.83 and $113.88; 13(x) and 13(x)

Sep 28 ’12/Oct 5 ’12: $107.89 and $112.26; 13(x) and 13(x)

Jun 29 ’12/ Jul 6 ’12: $107.25 and $110.94; 12(x) and 12(x)

Mar 30 ’12/ Apr 6 ’12: $105.67 and $109.27; 13(x) and 12(x)

The reader can quickly see the quarterly jump that occurs in the forward estimate as one quarters falls off and another is added, but also the prevailing P/E ratio’s for the market as we roll into each quarter.

A lot of pundits have said the S&P 500′s rally this year is “P/E expansion” driven, which isn’t entirely inaccurate. Earnings growth has been the main driver in our opinion, with modest P/E expansion at critical points.

With 498 of the 500 S&P 500 companies having reported, actual year-over-year earnings growth for Q1 ’13 was +5.4% versus an estimate on April 1 of 1.5%. Revenue growth was flat in Q1 ’13, and continues to be a concern.

Q2 ’13 earnings growth is currently projected at +3%, which is actually a little higher than the q3 ’12, q4 ’12 and q1 ’13 initially projected as those respective quarters started: the initial estimate was flat to 1.5% as each of those quarters began.

Financials and Telco continue to lead the expectations for Q2 ’13 with +17.8% and +18.2% sector earnings growth respectively.

Here is the progression for each of these sectors since Jan 1, ’13, Apr 1, ’13 and June 28, 13:

Financials: +19.2%, +17.6% and +17.8% (If Investment Banks and Diversified Finance are removed, then y/y growth for Financials is 11.3%, still much better than the Sp 500 as a whole.)

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Telco: 15.7%, 13.4% and 18.2%

Telco sector earnings expectations have actually gained strength in the quarter, while Financial sector earnings growth has remained steady since April 1, ’13.

Our assumption is that q2 ’13 S&P 500 actual earnings growth will come in at +5% – 7% for the quarter, when the majority of earnings reports are concluded by mid-August ’13.

Another assumption we have is that either the 3rd or 4th quarter of 2013 will see 10% year-over-year earnings growth for the S&P 500.

Our final assumption is that Financial sector earnings growth will come in quite nicely for Q2 ’13 and be up at least 20% to 25% for full-year 2013, versus the current full-year 2013 estimate of +18%.

Best Q2 ’13 sectors: Financials, Consumer Discretionary and Healthcare, as measured by the SPDR ETFs. The SPDR Gold Shares ETF (GLD) was down a whopping 22% in the 2nd quarter, and 26% YTD. (No exposure in GLD, still overweight Financials.) Most bond / fixed -income ETFs are down high single-digits year-to-date, despite the screaming. Not too bad (yet). We sold a chunk of our gold at $1,650 and then near $1,600.IBM article that posted over the weekend. The stock is in a technically precarious position. Accenture (ACN) and Oracle (ORCL), two companies that are thought to be good leading indicators for IBM’s (IBM) software and consulting business, had shaky quarters when both companies reported in the last few weeks. I’m nervous about the stock. IBM’s weighting in client accounts was cut in half after the alst earnings report. Big Blue doesn’t report for a few weeks. I may sell the entire position. (Long IBM)

International vs. Domestic Performance: Bespoke tracks an interesting dynamic within the Russell 1,000 i.e. stock performance of companies with all US-based revenues vs. those companies with 50% of their revenues being non-US based. In late April ’13, the outperformance of Domestic vs International was a whopping 600 basis points. As of last week, the outperformance, although still favoring Domestic’s, had narrowed to 310 basis points (bp’s). The US outperformance is the reason we chilled our outlook on the department store sector in mid-May, 2013. Technology is a predominantly International sector. It fits with our “return to global growth” theme, but it will require patience, as IBM proves. (Long more International than Domestic, within S&P 500 holdings.) One final interesting point: removing Utilities after their latest crushing thanks to the sharp rise in Treasury yields, the “Domestic Ex-Utilities” basket is beating International by 500 bp’s. All of this per Bespoke.

I’m sure we’ve omitted so much, but thank you for reading and stopping by:

Written By: Brian Gilmartin