SPX Forward 4Q Growth Rate Highest Since Q1 ’15

Little noticed this past week, with the seemingly never-ending selling to the S&P 500, was that the S&P 500 closed Friday, January 8th, 2016 at 1,922, opened Monday morning at roughly 1,900, and closed on Friday, January 15th, 2016, at 1,880.33. From Monday morning’s open to Friday’s close, the S&P 500 fell 20 points. If you slept from Monday morning to Friday afternoon at January 15th’s close, you’d wake up and think, “not that much happened”, again. (This has been a stealth market pattern for a while.)

With the big banks reporting this week, Citi (N:C) looked ugly, while JP Morgan (N:JPM) looked OK. Thanks to Dodd-Frank, heavy regulation, and post-2008 capital conservatism, if the whole Financial sector grew 5% in 2016, I’d be pleased. Core earnings growth, ex-litigation, is even better. As Jim Cramer said two years ago, analyzing bank earnings, particularly Bank of America Corporation (N:BAC), Dodd-Frank and the 2008 Mortgage Crisis became the 'Full-Employment Act' for plaintiffs' attorney’s and the US Treasury. Now Energy defaults and restructurings could weigh on the sector.

Clients' three largest bank holdings are JPM, BAC, and Wells Fargo (N:WFC). I’m comfortable with these for now. The sector needs a steeper yield curve, particularly Wells Fargo.

S&P 500 Earnings Date by the numbers:

• Forward 4-quarter estimate: $125.55 versus last week’s $126.64
• Forward estimate P/E ratio: 15(x)
• Forward estimate PEG: 10(x) – Finally positive. You’ll see the important change if you continue to read.
• S&P 500 earnings yield: 6.68%, the highest since October ’14.
• Forward estimate growth rate: +1.38%, the first firmly positive number since Q1 ’15 !

The S&P 500 tested the August ’15 lows this past week and then bounced, and the S&P 500 earnings yield continues to hover at elevated levels near October ’14 highs of 6.68%. An earnings yield of 6.68% indicates the S&P 500 remains relatively cheap, at least on that metric, maybe not the PEG.

Here is something I wrote in late December, 2015. Since then there is a trend in the 2016 growth rate of the forward estimate starting from this link’s data point:

• 1/15/16: +1.38%
• 1/08/16: -3.12%
• 1/1/16: -3.67%
• 12/25/15: +0.42%

Now here is data readers haven’t seen before: the January ’15 through March ’15 growth rates in the forward estimate:

• 3/27/15: +0.62%
• 3/13/15: +0.82%
• 2/27/15: +1.12%
• 2/13/15: +1.35%
• 1/30/15: +3.08%
• 1/16/15: +4.77%

The point for readers to take away from this is that we saw a rapid deterioration in forward earnings growth all through Q1 ’15 and not only do we now start to lap easier compares for S&P 500 earnings, BUT it is highly unlikely that we see Energy sector earnings decline 60% in 2016, as is likely to happen in 2015.

Analysis/Conclusion: Looking back at my earnings spreadsheet, the “forward 4-quarter estimate” and growth rate didn't start to deteriorate until July 2008, and at that point the forward S&P 500 estimate fell from $104-$105 to the low $60s by early May 2009. That was a 40%-45% decline in expected earnings in an 8-month time period. In 2000, with the collapse of the tech bubble, the forward estimate declined from $55 to $45 in a period of a two years.

In 2015, the S&P 500 operating earnings are expected to decline maybe 1%-2%, and I’d be surprised if we saw even that mild rate of deterioration again in 2016.

Here is a quick recap:

• 2001-2002 bear market: S&P 500 forward estimate declines 20%, and the NASDAQ corrects 80%
• 2008-2009 bear market: S&P 500 forward estimate corrects 40%-45%, S&P 500 corrects 50%
• 2015-2016 bear market: S&P 500 forward estimate declines 1%, S&P 500 corrects (fill in the blank)?

In meetings with clients, I do try and explain that the risk of a secular bear market is probably far lower today than at any point in the last 20 years, but this is also a different correction for the S&P 500 than we’ve seen in the last few years. The S&P 500 has not made a new high in seven months, that is unusual for the post-2009 world, absent the 20% correction in 2011.

This correction could be more about the end of QE, higher Fed funds rates and even – as Josh Brown pointed out last week – the rise of Donald Trump and Bernie Sanders, two very different Presidential candidates than we have seen in decades.

Expect “core” S&P 500 earnings growth of 5% when Q4 ’15 earnings are mostly reported by mid-February ’16. That view hasn’t changed.