S&P 500 P/E Ratio Now Expanding. Return Of Global Growth?
Brian Gilmartin | May 20, 2013 12:24AM ET
We have our first CNBC appearance on Monday morning, May 20th at 9:15 am central time (approximately). We’ll be talking Home Depot (HD) and Lowe’s (LOW) (but primarily Home Depot) on CNBC’s Big Data Download segment. Both retailers report fiscal Q1 ’14 earnings this week.
Judging by the market rally this year, S&P 500 earnings do not seem to matter much to the overall market backdrop, as the S&P 500 rose another 2% last week, and over 16.5% year-to-date.
Meanwhile, Q1 ’13 earnings are up 4.8% over Q1 of last year, while revenue growth remains flat year-over-year. Expect y/y earnings growth to improve as we move through 2013, thanks to easier “comparisons” against the 2nd half of 2012.
Revenue growth is still an issue.
For 2013 as a whole, current ThomsonReuters estimates expect 7.6% year-over-year growth, for the S&P 500, down from an expectation of 10% growth as of January 1, 2013.
The best sector in terms of earnings growth remains Financials, which grew earnings 18% in Q1 ’13, well ahead of all sectors except Telecom’s 15.6% growth.
The forward 4-quarter earnings estimate is now $113.56, down a penny from last week’s $113.57. 463 of the 500 companies in the benchmarket have reported Q1 ’13 results, per ThomsonReuters.
The P/E ratio on the forward S&P 500 estimate is now 14.68(x).
The earnings yield is now 6.81%.
The year-over-year growth of the forward S&P 500 estimate is now 4.05%. That is a key metric and has remained relatively flat the last 4 weeks.
We don't have much to add statistically or otherwise: the forward P/E ratio on the S&P 500 is now the highest (according to our internal spreadsheet) at 14.68(x) since the 2009 market low. The average P/E ratio over secular bull markets is typically 17(x) earnings, and the stock market typically peaks at 25(x) – 30(x) earnings. We are still well short of average in terms of “P/E reversion”, but the world is different now too.
Over the shorter-term time frame, the stock market seems stretched relative to Bollinger Bands®, the standard deviation from the 50-day moving average, and the numbers of sectors with a high percentage of overbought names, but it doesn’t seem to matter.
My own opinion is that when the market sees “P/E expansion” it usually portends good things. The market P/E only expands during periods of economic stability or growth.
Bespoke, when comparing today’s 2013 stock market to history, thinks today’s action is most similar to the 1995 stock market, a year when the S&P 500 returned 34.11%.
Interesting stat: in late April, in Bespoke’s weekly summary published later on Friday nights, they noted that S&P 500 companies with all predominantly US-revenues (i.e. labeled Domestics) had outperformed those S&P 500 companies where a good percentage of their revenues were non-US, (i.e. labeled Internationals), by a whopping 1330 basis points or 13.3% (as of that publication data in late April ’13).
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I think this could be in the early stages of changing. Japan is in the early stages of reigniting their GDP, and Europe is now stable (see credit spreads graph below). See the graph/chart (link below) from Helene Meisler, a technician on TheStreet.com (TS) on China. The large-cap internationals, which is the Technology sector to a large degree, should start seeing P/E expansion.
Global growth here we come…
Here are our WSJ article . We’ve heard this for a while now. The catch is that faster revenue growth will offset some of the margin contraction we might be expected to see in a rapid US or global expansion. As companies add payroll, presumably it should be offset with more business or better revenue growth.
Our client portfolios remain overweight Financials, and Technology. Industrials are a sector we like and need to lift exposure to (wow, has General Electric (GE) lagged), to get exposure to global growth. We added the ProShares Short 20+ Year Treasury ETF (TBF) this past week, in anticipation of the Treasury market being the next shoe to drop. We are hedging our overweight to credit risk in balanced / bond accounts, with the TBF. (Long TBF, GE).
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