S&P 500 Earnings Update

The combined earnings per share for all S&P 500 companies ticked up again last week, from $159.47 to $159.92. The combined EPS reported in 2019 was $162.93, which is now only 1.85% above the current forward estimates.

92% of S&P 500 companies have now reported Q3 results, with 84% reporting earnings above expectations and 73% reporting revenues above expectations. In total, S&P 500 companies have reported earnings that are 19.4% above expectations. (FACTSET)

Q3 earnings are down -7.5% from last year and aren’t projected to return to growth until Q1 2021. It’s still a stark improvement in expectations from 6 months ago. Of the 63 companies that issued Q4 guidance, 70% of those companies issued positive guidance.

While the forward EPS has risen, the S&P 500 price has risen about 10% in the last two weeks. Friday’s close was a new all-time closing high for the Dow, S&P 500, and Russell 2000. Therefore the price to earnings ratio (PE) has risen to 22.4, which is 25% higher than the 5-year average and 38.5% above the 10-year average.

The earnings yield on the S&P 500 has ticked down to 4.46% (again, based upon the 10% increase in the index) while the 10-year Treasury bond rate still hovers below 1.00%.

It’s a consistent theme of contrasting data points that give credence to the bull or bear thesis. Bears look at soaring COVID cases and a high PE ratio, while Bulls look at treatment options that increase the likelihood we can return to normal within the next 12 months, and reasonable valuations when adjusted for low-interest rates. It’s the glass half full or half empty philosophy. Regular readers know I’ve leaned towards the half-full side, and so far the markets have agreed with me.

I want to highlight the broad-based nature of this advance. The above chart is the S&P 500 advance-decline line breakout out to new highs.

This chart is the emerging markets index fund (EEM) also breaking out to new 52 week highs.

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