The forward 4-quarter estimate for the S&P 500 fell slightly to $105.66 last week, from the previous week’s $105.77 as the forward estimate for the key benchmark continues to be locked in a range between $104 – $107, as it sits slightly below its all-time high. The S&P 500 was trading at 12.9(x) that forward estimate as of Friday’s close.
Even Warren Buffet has now commented on what we have have been saying for some time: despite corporate earnings approaching an all-time high, the S&P 500 remains 13% – 15% below its all-time high reached in March 2000 and then again in October, 2007.
We’ve essentially had 10 – 12 years of p/e compression, or what i like to tell clients, trying to skateboard uphill.
Corporate earnings have actually improved the last few weeks (despite what is perceived to be a weaker earnings season), as has the “beat rate” per ThomsonReuters, which is now approaching 65% versus the 50% – 55% beat rate as q4 ’11 earnings were just getting started. Of all the sectors, industrial, technology and consumer discretionary look to be the best beats, as industrials have seen 80% of companies within the sector beat estimates, while both tech and consumer discretionary sectors see 70% of the companies reported have better than expected results.
q1 ’12 expected earnings growth has fallen to just 2% while full year 2012 earnings estimates for the S&P 500 have fallen to 8.2% versus the 13% expectation for this year in early October.
At least from an earnings perspective, it is hard to see why the stock market has done so well this year. It could be analysts have greatly underestimated earnings growth for the back half of 2012, but the one unambigious positive off the 2008 – 2009 recession has been stalwart earnings growth, and now that it looks like it has fallen to mid-single-digit expectations, suddenly “the market” gets a tailwind.
Go figure.
Here is how quarterly earnings have fared historically (as well as what is seen for 2012)
q3 ’10 +31% y/y earnings growth (for the S&P 500)
q4 ’10 + 37%
q1 ’11 +18.9%
q2 ’11 +12.1%
q3 ’11 + 18%
q4 ’11 +9.2% (not fully reported)
q1 ’12 + 2.2% (estimated)
q2 ’12 +8.3% (estimated)
q3 ’12 +5.3% (estimated)
q4 ’12 +15.4% (estimated)
Our biggest sector overweights continue to be tech and industrials, while financials are expected to show the greatest earnings growth of any sector this year at +20%, versus the 8.2% expecetd growth for the S&P 500. (We are slowly picking at financials, but we’ve owned Schwab and Jp Morgan forever, and we prefer to buy on pullbacks. Financials have been pretty well bid since Jan 1, 2012.)
Bottom line: Corporate earnings growth has been robust off the 2008 – 2009 recession low and an unambigious positive for the stock market, and yet the last two years – 2010 and 2011 – corporate earnings growth for the year has exceeded the benchmark return by a wide margin. 2012 has started off in an opposite fashion. As 2012 earnings growth has suddenly been tempered, the S&P 500 has found a consistent bid, as job growth and what looks to be a real stabilization in housing values continues. My guess is that the 2nd half of 2012 will see stronger earnings growth and more upside surprises if this strength continues.
It is a big week for retail earnings: WalMart (WMT) and Home Depot (HD) report Tuesday morning before the bell (as does Macy’s) (M) while Dell (DELL) reports after the bell on Tuesday. On Wednesday, we hear from Hewlett-Packard (HPQ) and TJX (TJX) and on Thursday we hear from Target (TGT), Gap Stores (GPS) and Kohl’s (KSS). Toll Brothers (TOL) the high end homebuilder reports Wednesday too. That is definitely a report and conference call that will scrutinized closely.
Check back on the site later on Monday for a number of earnings previews.
long tech, industrials, SCHW, JPM, WMT, HD (small position)
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