S&P 500 Earnings Update & Economic Data Review: Another EPS Increase

The earnings per share (EPS) for all S&P 500 companies combined increased again last week from $167.58 to $168.62. This is the highest EPS since March 13th, 2020.

About 5% of the S&P 500 have already reported Q4 earnings so far. Off to a great start, with 96% of companies beating estimates by a combined rate of 27.4%. (I/B/E/S data from Refinitiv)

The S&P 500 index declined -1.48% last week. The increase in the EPS, along with the decline in price, pushes the price to earnings (PE) ratio down to 22.3 from 22.8. Put another way, investors are currently paying $22.8 dollars for every $1 dollar in S&P 500 earnings.

The earnings yield for the S&P 500 increased from 4.38% to 4.47%, while the 10-year Treasury bond rate declined from 1.105% to 1.097%.

The equity risk premium increased from 3.277% to 3.378%. So although the PE ratio is above the historical average (stocks expensive), when adjusted for interest rates, the equity risk premium is more attractive than it was in 2010, when the S&P 500 was trading around 1,100.

Weekly Economic Data Review

The NFIB Small Business Optimism Index for December missed expectations by a wide margin, showing a steep decline from 101.4 to 95.9. I’m always on the lookout for silver linings, but there’s nothing to like about this report. Small businesses employ roughly 50% of the nations workforce, so these sentiment readings are an important barometer for future economic conditions.

Per the NFIB: “Concern about economic policy in the new administration and the increased spread of Covid-19 that is leading to renewed government-mandated business closures have owners pessimistic about future conditions over the first half of 2021”.

9 out of the 10 components within the report declined for the month. The two sub-indexes showing the biggest declines were:

1.) Percentage of owners expecting better business conditions over the next 6 months (this was one of the steepest monthly declines since 1986 and typically associated with recessions)

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