S&p 500 Earnings Update & Economic Data Review - Sunday, March 7

The earnings per share (EPS) for all S&P 500 companies combined increased to $174.58 this week, an increase of 0.22%. The forward EPS has increased 9.78% so far this year.

99% of S&P 500 companies have now reported Q4 results. 79% of companies have beaten earnings expectations, and results have come in a combined 15.8% above estimates. (I/B/E/S data from Refinitiv)

Now that Q4 results are largely in we have a good look at full year results for 2020. The current forward EPS is now 7.2% above 2019’s prior all time high.

The S&P 500 index finished higher by +0.81% for the week.

The index increased more than the EPS this week so the price to earnings (PE) ratio got a little more expensive at 22 times forward earnings.

The 10 year treasury bond rate increased by about 9 basis points for the week, the highest weekly close since February 2020. The earnings yield for the S&P 500 declined by 3 basis points, currently coming in at 4.54%.

The decline in the earnings yield plus the increase in the risk free rate caused the equity risk premium (earnings yield minus 10 year treasury rate) to decline to 2.99%; the first weekly close below 3% since November 2018.

ERP is a valuation tool, like the PE ratio, where the reading is inverted. Meaning the higher the reading, the more attractive stocks are in relation to fixed income alternatives. And vice versa, the lower it goes, the less attractive stocks are in relation to fixed income alternatives. A 4.50% earnings yield (plus a 1.5% dividend yield) compared to treasuries yielding 1.5% still favors stocks quite convincingly.

Economic data review

The Institute for Supply Management (ISM) Manufacturing PMI for February came in at 60.8, well above expectations and the ninth straight month of growth. The last time ISM Manufacturing came in this high was February 2018, and prior to that you have to go back to May 2004. “For the sixth straight month, survey panelists’ comments indicate that significantly more companies are hiring or attempting to hire than those reducing labor forces.”

The ISM Prices index increased 3.9 percentage points for the month, and is now at the highest level since 2008. “Aluminum, copper, chemicals, all varieties of steel, soy, petroleum-based products including plastics, transportation costs, electrical and electronic components, corrugate, and wood and lumber products all continued to record price increases.” More signs of inflation.

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