Patience on earnings

With the S&P500 up 100 points since last week’s low of 1882, the worry about global growth and earnings has been given a breather in the last few days trading. Last weeks low was about 12% below the May high (today’s close is at -8.6%). Last week, the vampire squid themselves lowered their S&P500 EPS forecast for 2015 and 2016 to $109 and $120 respectively, or approximately 18.2 and 16.6 times today’s close with the snappy by-line that “flats the new up”.

The forward PE, according this FACTSET report, as at last Thursday’s close (1924) was at 15.1, down from 16.8 in early May (as per this post).

click to enlargeForward 12 month PE S&P500 October2015

Year on year revenue growth for the S&P500 is still hard to find with Q3 expected to mark the third quarter in a row of declines, with energy and materials being a particular drag. Interestingly, telecom is a bright spot with at over 5% revenue growth and 10% earnings growth (both excluding AT&T).

Yardeni’s October report also shows the downward estimates of earnings and profit margins, as per below.

click to enlargeS&P500 EPS Profit Margin 2015 estimates

As usual, opinion is split on where the market goes next. SocGen contend that “US profits growth has never been this weak outside of a recession“. David Bianco of Deutsche Bank believes “earnings season is going to be very sobering“. While on the other side Citi strategist Tobias Levkovich opined that there is “a 96 percent probability the markets are up a year from now“.

Q3 earnings and company’s forecasts are critical to determining the future direction of the S&P500, alongside macro trends, the Fed and the politics behind the debt ceiling. Whilst we wait, this volatility presents an opportune time to look over your portfolio and run the ruler over some ideas.

3 responses to “Patience on earnings

  1. And remember… these are pro forma earnings, i.e. without the bad stuff. Q2 pro forma earnings were up about 8% whereas the corresonding GAAP earnings were down 2%… I wonder what Q3 will bring. Have you seen Icahn’ s video called Danger Ahead? I am not into videos but this is a must see imho.

    Btw, Buffet reduced his MunicRe stake from 12% to 9.7%. So he puts his money where his mouth is.


    • Thanks Eddie, yep reconciling everybody’s EPS was a pain, didn’t bother checking too much for the post.
      I saw a bit of Icahn’s video on TV, he definitely has a point but I have history with that guy investment wise that didn’t end nicely so I treat most things he says with suspicion.
      By all accounts Buffet is going big time into insurance and annoying people big time on the reinsurance side. It points further to Ajit possibility the chosen one!!
      What do you think of this equity market? a good run-in to year end or more volatility?

  2. My bet is on more volatility until year end. Maybe one or two air pockets like the one we had lately in SPX, i.e. a sharp drop by a couple of percentage points. This might be the beginning of a bear market since profits seems to roll over (I read this morning that Q3 profts are down c. 5% YoY according to FactSet and these are probably pro forma profits). I doubled my hedge position in August and keep accumulating cash…


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