S&P 500 Earnings Update & Economic Data Review

The forward earnings per share (EPS) for all S&P 500 companies combined increased last week from $159.02 to $167.58. The sizable increase in EPS is attributed to the rollover into a new quarter/year. (Note: the decline in EPS for the prior two weeks was a result of adding Tesla to the S&P 500 index. Tesla has very low-profit margins while they invest heavily to increase production. The inclusion of the company – which is now the 4th largest company in the S&P 500 – brings down the EPS projections for the entire index.)

The S&P 500 index increased by 1.83% last week, but the increase in the EPS was larger than the increase in price. Therefore the price to earnings (PE) ratio actually declined from 23.6 to 22.8.

Treasury bond rates broke above 1% for the first time since March.

If we zoom out to a 10-year chart we can see the prior swing lows in 2012, 2016, and 2019 (in the range of 1.336% to 1.429%) appear to be the logical upside target.

The increase in EPS corresponded with an increase in the earnings yield on the S&P 500, from 4.23% to 4.38%. The yield on the 10-year Treasury bond increased by a greater amount (0.917% to 1.105%), thereby the equity risk premium declined from 3.317% to 3.277%.

Q4 earnings will begin on Friday as the big banks start reporting. 18 companies have already reported results, and all 18 have beat expectations by a combined rate of 13.1%. So we are off to a good start.

Weekly review of economic data

ISM Manufacturing PMI reported its seventh straight month of expansion. 60.7 is the highest monthly reading since September 2018 and one of the highest readings in the last decade. The gains were broad-based, with “4 of 5 sub-indexes in strong growth territory.” A solid report all around, that surpassed even the most bullish estimates.

The ISM Services PMI came in at 57.2 for December, which beat estimates and the prior month's reading of 55.9. With 7 of the 11 sub-indexes reporting trend direction of growing or increasing.

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