Earnings Update, Small Business Optimism, Inflation (CPI), And The Jobs Recovery…

The forward-looking Earnings Per Share (EPS) for all S&P 500 companies combined increased last week from $160.40 to $160.66. With now 499 out of 500 companies having reported Q3 results, 84% of companies have beat earnings estimates, and 79% of companies have beat revenue estimates. In the aggregate, earnings have come in 19.5% above expectations, which is well above average.

It looks like Q3 earnings will be down about -6% from Q3 last year, led by the -100% decline in earnings from the Energy sector. 2020 earnings (combines the 3 quarters that have been reported and current 4th quarter earnings estimates) are down -15.23%. 2021 earnings growth estimates are currently +22.5%, and 2022 growth estimates are currently +16.6%.

The S&P 500 price index declined 0.96% last week while the earnings per share increased. This led to a decline in the price to earnings ratio (PE) from 23.1 to 22.8. Like 2019, it looks like 2020 will be another year of “multiple expansion”. We know the equation for stock market returns is: Dividend yield + Earnings growth + or – change in valuation (price to earnings ratio). So what I mean by “multiple expansion”, is when the market goes higher without earnings growth. Clearly, the market is looking ahead to brighter days.

The earnings yield on the S&P 500 increased from 4.34% to 4.39% last week, while the 10-year treasury bond rate fell from 0.97% to 0.89%. Stock valuations adjusted for interest rates still look attractive.

Economic Data Review

NFIB Small Business Optimism came in at 101.4, down from 104.0 last month. The index is still well above the 47 year average of 98. The biggest contributing factor was the decline in the outlook for general business conditions over the next 6 months. That data point fell from 27 to 8 this month. To put this in context, outlook for general business conditions hit a low of 5 in March. So this is telling us that small business owners are almost as pessimistic now as they were when COVID first hit.

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