S&P 500 Earnings Update

The Earnings Per Share (EPS) for all S&P 500 companies combined over the next 12 months has ticked up this week from $158.32 to $159.47. The year over year decline in the growth rate has shrunk to -7.7%, as companies continue to report solid numbers.

89% of S&P 500 companies have now reported Q3 earnings. 86% of those companies have beat earnings estimates and 79% of companies have beat revenue estimates. And in the aggregate, they are reporting earnings that are 19.5% above expectations. 41 of the 60 companies that have issued forward guidance, have issued positive forward guidance. (FACTSET)

As a result of last weeks stock market rally, the price to earnings ratio for the S&P 500 has risen to 22.0

This represents an earnings yield of 4.54%, which is still comfortably ahead of any alternatives in the fixed income space.

Overall, companies continue to report results that beat expectations by a record margin. Estimates for 2021 and 2022 continue to rise each week. Now it looks like 2021 earnings growth of 23.5% and 16% earnings growth in 2022. Regular readers will now I’ve been following this story for a long time. Those who were fixated on the scary headlines and the many “what-if” scenarios were missing the bigger picture.

The markets have been whipsawed over the last month or so in expectation of the election. At one point it looked like we were going to get a drop back down to the 200 day moving average, then it looked like we were breaking out to the upside, then we dropped back down again. Now that the results are mostly in, the market is back in rally mode. While the S&P 500 never got back to the 200 day moving average, the Dow did. It turned out to be great support.

As I pointed out numerous times, declines after an upside breakout are perfectly natural. As the market digests the gains and prepares for the next leg up. I hope this helped some readers stay the course.

This leg higher has coincided with breakouts to new 52 week highs in the Health Care and Basic Materials sector.

While the year to date sector performance chart still shows tech leading by a solid margin.

Over the last week, the Volatility Index (VIX) has fallen almost in half (that’s a good thing!), the Dow rose about 1500 points. Everyone was clearly scared. The problem is, the biggest market impacting events are the ones we don’t see coming (COVID 1st wave).

Every analyst cited the election and 2nd wave concerns. When everyone is scared and prepared for something it either; A: never happens, or B: not nearly as bad as feared.

In the post 2008 world, everyone gravitates to the scary headlines and worst case scenarios. Few ever ask the questions in reverse. Regular readers remember the “upside risk” potential I talked about. What if things actually get better? What if things don’t turn out as bad as feared?

The upside risk is missing out on a sharp and tremendous rally. Now they have to get back into a market that has gone up about 3000 points in a straight line.

For those who stayed the course, you should be commended. This is not easy, but I’ve always said that the day there is nothing to worry about is the day I sell everything. Because at that point, it can’t get any better it can only get worse.

It’s still too early to say, but it looks like this election result could be the best case scenario from a markets and economy standpoint. There is a chance of some easing on trade restrictions and better relationships with key trading partners, without major changes to the pro-growth agenda already in place. Time will tell.

We’ve got some key data points this week with Small business optimism and the JOLTS report on Tuesday, along with inflation numbers on Thursday. 

In the mean time, I leave you with a few key quotes from last week’s earnings conference calls: Things in China have returned to normal and it won’t be long before they return to normal in the US too.

“Investors and analysts have asked us in the last few months about making a call about the bottom of this cycle. With tremendous uncertainty about COVID-19 situation and the elections, we have not been willing to make the call. Today we are making that call. We expect that June and September quarters were the bottom for this business cycle for Microchip (NASDAQ:MCHP). We are guiding to a much stronger than seasonal December quarter and we expect significant growth in calendar year 2021.” – Microchip (MCHP) CEO Steve Sanghi

“…while it’s looking like we’re going to have another wave of some form of potential partial shutdown even in the U.S., I think most of our advertisers are more prepared to think about that and to handle that shutdown in a way that is very different than what they did in Q2, which was panic first and shut everything off and then try to figure things out.” – Cardlytics (NASDAQ:CDLX) CEO Lynne Laube

“The recovery in Greater China, especially in mainland China, has been the strongest. Results have improved meaningfully since February, demonstrating the resiliency of travel when the virus is perceived to be firmly under control. Occupancy in mainland China reached 67% in September, a bit ahead of occupancy in September of last year and an extraordinary improvement from 9% occupancy in February.” – Marriott International (NASDAQ:MAR) CEO Arne Sorenson

“Travel demand in China also continued to show strength beyond the end of the third quarter. During the Golden Week holiday from October 1 through October 8, over 45% of the population travel, and we realized a 17% increase in RevPAR and a more than 35% increase in spend on food and beverage as compared to the same period in 2019.” – Hyatt Hotels (NYSE:H) CEO Mark Hoplamazian

“The good news is that consumers came into this recession with strong balance sheet, and they do appear to be behaving prudently with increased savings rates and a focus on paying down their debts. We are therefore seeing encouraging stabilization of credit performance across consumer asset classes” – LendingClub (NYSE:LC) CEO Scott Sanborn

“The decrease in April was 71%. I’m going to give you US numbers. If there were 100 cars out and about on the road, there were only 29. driving around — I’m going to give you U.S. There was no traffic and no one was out because we were supposed to be on lockdown. At the very end of October, if there were 100 cars driving around pre-pandemic, it would have been 77. So the decrease then was 23%. So we’ve seen marked shifts in miles driven from pre-pandemic to what was then peak of pandemic to where we are this fall.” – Waze Managing Director Suzie Reider

“…it’s noteworthy that TSA data for October 18 showed over 1 million travelers in a single day for the first time since March 16 this year.” – Hyatt Hotels (H) CEO Mark Hoplamazian

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Written By: Michael Gouvalaris