S&P 500 Earnings Update And Economic Data Review -Sunday, Feb. 14

The earnings per share (EPS) for all S&P 500 companies combined increased to $173.65 this week. This marks the seventh straight week the forward EPS has increased.

74% of S&P 500 companies have now reported Q4 results. 82% of those companies have beat earnings expectations, and the combined results have come in 17.3% above expectations. (I/B/E/S data from Refinitiv)

The stock market continues to defy gravity. The S&P 500 increased 1.23% this week, for another record closing high.

The S&P 500 increased more than the EPS this week, so the price to earnings ratio rose to 22.7.

The earnings yield on the S&P 500 is now 4.41%, while the 10 year treasury bond rate rose to 1.20% (the highest close since March 18th). The equity risk premium (earnings yield minus 10 year treasury rate) is now 3.213%, which remains generally supportive for risk assets and above average PE valuations.

Economic data review

The Consumer Price Index (CPI) increased +0.3% in January, and is up +1.4% from this time last year. Gasoline and fuel costs were the main driver of the monthly increase.

The Core CPI (excludes volatile food and energy prices) was unchanged in January, and is also up +1.4% from this time last year. Core CPI was up 1.6% year over year last month, so the inflation trend moved lower.

Small business optimism continues to disappoint. The January reading came in at 95, down 0.9 below last month. Current job openings increased 1 percentage point and expected credit conditions increased 2 percentage points. Every other category was negative or unchanged. The percentage of small business owners expecting the economy to improve decreased another 6 percentage points, its lowest level in more than 5 years.

Say what you will about policy, but increased taxes and regulations are an impediment to economic growth. I don’t think its a coincidence the small business optimism index soared after the 2016 election results and stayed well above average until COVID hit. We can debate whether these policies actually have a trickle-down effect to workers, but I don’t think there is a debate these policies have a net negative effect on small businesses that employ roughly 50% of the nations workforce. These policies can have an outsized effect on small businesses that may not be able to handle them as well as the companies in the S&P 500. Judging by the sentiment in these reports, I suspect the new range of the small business optimism index will be in the range of 85-95 (the average range of the 2008 recovery to the 2016 election) for the foreseeable future.

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