S&P 500: Forward Estimate Growth Rate Continues Higher

Q2 ’13 earnings are thought to officially conclude this week, with Wal-Mart’s (WMT) fiscal Q2 ’14 financial results due out before the bell on Thursday morning, August 15th. As of Friday, roughly 450 of the S&P 500 have reported Q2 ’13 earnings, with y/y growth of 4.5% for the S&P 500 earnings and y/y revenue growth of 2.1%.

Per ThomsonReuter’s ‘This Week in Earnings” the forward 4-quarter estimate of $115.95 this past week was just a penny lower than last week’s $115.96.

The P/E ratio as of Friday’s close on the forward estimate was 14.6(x).

The earnings yield on the S&P 500 using the forward estimate is now 6.86%.

More importantly, the y/y growth of the forward estimate is now 7.19%.

Here is a quick summary of the y/y growth rate of the “forward 4-quarter S&P 500 estimate” as of Friday, the 2nd of August, going back to Jan 1, ’13:

• 8/9/13: +7.19%
• 7/12/13: +4.41%
• 6/14/13: +5.06%
• 5/10/13: +3.88%
• 4/12/13: +5.27%
• 3/8/13: +6.01%
• 2/8/13: +6.28%
• 1/11/13: +6.02%

(We measure the percentage change based on this week’s “forward 4-quarter” estimate, versus the same forward estimate 52 weeks prior. In this week’s case, we are measuring the $115.95 against the 8/10/12 forward estimate of $108.17.)

Based on the expansion of the forward 4-quarter growth rate, we remain bullishly biased, but truth be told, the S&P 500 earnings data is lapping very easy comps from the back half of 2012. For example, the above forward 4-quarter estimate of $108.17 in the last sentence was just a 1.28% y/y growth rate, from the August, 2011 estimate. The S&P 500 bottomed in early June last year after the nasty correction in May ’12, fully 60 days before the S&P 500 forward growth rate bottomed.

As always, the market itself is your best leading indicator.

This is where I also think most “earnings watchers” get it wrong: they are constantly monitoring current earnings, revisions, beat rates, etc., and yet very few discuss that uber-critical, “Forward 4-quarter” growth rate, and its trend. Only blog (Yra is a CME trader and frequent Rick Santelli and CNBC guest) on the Japanese predicament. Still long and wrong on the Rising Sun, but I do think Abe and Kuroda will get this done. Watching how the Yen responds to a trade to the low 90′s. Should bounce from there. The Yen needs to weaken in my opinion, to send the Nikkei higher, and the Japanese government bond market lower.

Asset Allocation Update:
We remain tilted towards equities more heavily in the standard 60% / 40% asset allocation benchmarket portfolio, given the flat 13-year return on the S&P 500 (either in nominal or inflation-adjusted return basis) and underweight fixed-income given the 40-year bull market in Treasuries and the risk-reward in terms of bond market yields. We have some direct Japan exposure via ETFs, but prefer US large-cap and the S&P 500 / 100 as the most-attractively valued asset class today.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Our primary equity overweight remains the Financial sector, although we are warming up to the beaten-down Basic Materials sector. We added to our Basic Mat weighting this week, by buying FCX. Our three primary overweights are Financials, Technology and Industrials. Basic Materials is just 3% of the S&P 500 by market cap. It probably wouldn’t get to be more than 5% – 6% of client exposure under the best of circumstances.

We are in the process of selling all of our fixed-income mutual funds, and will trade ETFs, CEFs, and individual bonds for fixed-income exposure going forward. We are overweight credit-risk given the improving US economy and the robustness of US corporate cash-flow.

The S&P 500 remains seriously overbought, but that has mattered little. We are constantly looking for oversold names that can weather bad earnings news, and look to be trading around long-term support. Names like Caterpiller (CAT), Deere (DE), Intuitive Surgical (ISRG) qualify as beaten down, oversold names. Deere reports this week. The global Agriculture business remains in good shape, but DE has lagged the S&P 500 this year by quite a bit. We would be a serious buyer of DE near $75, the 200 week moving average. (Long ISRG)

Wal-Mart (WMT) reports Thursday morning, August 15th before the opening bell. In our opinion, at a $500 billion annual run rate in revenues, there is no better real-time indicator for the consumer today, and consumption is 2/3rd’s of the US economy.

Written By: Brian Gilmartin