S&P 500 Earnings Continue to Decline as EPS Estimates
by the Curmudgeon
We’ve previously called attention to the decline in S&P 500 earnings for the last 5 or 6 quarters (depending on the data source), while stock prices rose sharply: S&P 500 Earnings and Estimates Decline as Stock Prices Soar
This short post is an update that shows EPS estimates continue to be ratcheted down from their widely optimistic levels. That is why we are not a believer in “forward earnings” - the analysts are almost always wrong!
Earnings Insight, Sept 2,
Negative Earnings Growth: For Q2 2016, the blended earnings decline for the S&P 500 is -3.2%. The 2nd quarter marked the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009. For Q3 2016, 78 S&P 500 companies have issued negative EPS guidance and 33 S&P 500 companies have issued positive EPS guidance.
During the past year (four quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.9%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.4%. During the past 10 years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has also been 3.8%. Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the third quarter was smaller than the one-year, five-year, and 10-year averages.
As the bottom-up EPS estimate declined during the first two months of the quarter, the value of the S&P 500 increased during this same time frame. From June 30 through August 31, the value of the index increased by 3.4% (to 2170.95 from 2098.86). This quarter marked the 16th time in the past 20 quarters in which the bottom-up EPS estimate decreased during the first two months of the quarter while the value of the index increased during the first two months of the quarter.
Chart Courtesy of FactSet
Thomson Reuters I/B/E/S, Sept. 2, 2016 (subscription required):
Second quarter earnings are expected to decline 2.2% from Q2 2015. In the S&P 500, there have been 73 negative EPS pre-announcements issued by corporations for Q3 2016 compared to 28 positive EPS pre-announcements. By dividing 73 by 28 one arrives at a Negative/Positive ratio of 2.6 for the S&P 500 Index. That means there are 2.6 times as many negative earnings guidance vs. positive earnings guidance announcements for Q3 2016.
DoubleLine Webcast, by Jeffrey Gundlach on Sept 8, 2016:
Earnings estimate start out at 10% -to- 12% higher each quarter, but then decrease substantially- lately to NEGATIVE growth as per this chart:
The trend of analyst earnings estimates way off the mark continues. It’s a “triumph of hope over experience” as per this chart (note that earnings peaked in 3Q-2014):
Gundlach had a couple of gem-like quotes on the webcast:
“When you hear a forecaster say "never," it's
about to happen!”
“Coming to an end: a world of negative interest rates, QE forever, long term interest rates in a never ending decline. We are about to see interest rates rise, albeit gradually.”
Gundlach thinks the US 10-year T Note will be higher between now and year end, possibly in the low 2% range.
Leuthold Weeden - Perceptions for the Professional, Sept 2016 (subscription required):
Despite the overall rising numbers of analyst coverage, accuracy of consensus estimates on EPS hasn’t improved. Deviation of actual reported earnings from consensus have jumped higher post 2008-2009. Even though it’s much easier for analysts to get top-line estimates right (judging by the much lower sales-surprise figures), investors focus more on the bottom line. Again, our data shows that this phenomenon is more evident among Small Caps, especially since the financial crisis. Small companies fail to attract analyst coverage, and the quality of the coverage they do have is declining, leaving them prone to larger price movements on earnings release day.
It is truly unbelievable that despite negative earnings and productivity growth, extremely weak US and global GDP, various economic gauges declining, etc. US stock prices could be at or within ½ % of all time high’s. The NASDAQ 100 (QQQ ETF) has a (past 12 months) P/E ratio of 24 and quietly made two new all-time highs in the three trading days this week! The Russell 2000 (IWM ETF) also hit all time high’s this week. It has an infinite (nil) P/E ratio which was 82.89 one year ago in expectation of much higher earnings that never materialized.
We are baffled, flummoxed, and frustrated by this continued “great disconnect” between levitating stock prices and the real economy/negative earnings growth. While we don’t know when this will end, we know from over a half century of watching markets that it will end very, very badly.
From hedge fund titan Paul Tudor Jones in a letter to limited partners obtained by Bloomberg:
“We have to think outside the box…. I firmly believe the changes we have made put us in a position to be successful even in this desultory macro environment.”
of rates (by global central banks) is perversely encouraging our government
officials to pursue an ever increasing buildup of sovereign debt in exchange
for the short term stability they so avidly seek."
Good luck and till next time...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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