The forward earnings per share (EPS) for all S&P 500 companies combined declined last week from $161.17 to $159.01. This is the biggest one week EPS decline since the week of May 15th, but not entirely unusual. I expect a fairly large increase in the forward EPS when we roll into the new quarter/year, but this will need to be monitored.

The S&P 500 index declined -0.17% last week. The price decline was smaller than the decline in the EPS, therefore the price to earnings ratio increased from 23x to 23.3x, which is well above the 10-year average.

The earnings yield for the S&P 500 decreased from 4.34% to 4.29%, while the yield on the 10 year Treasury bond declined from 0.948% to 0.926%. Valuation compared to fixed income remains very positive.

Put a different way, the above chart shows the earnings yield minus the 10-year treasury rate (equity risk premium) over the last 10+ years. Despite being near all-time highs, the valuation compared to interest rates are even more attractive than it was 10 years ago (when the S&P 500 was trading at 1100, compared to 3700 today).

Economic Data Review

Q3 GDP

We got our final read on Q3 GDP. The economy grew a record 33.4% for the 3rd quarter, now $21.17 trillion. But the damage was done in Q2 (-31.4%), so the gains are coming off a lower base. The economy remains below the pre-COVID high point but has now recovered about 74% of the losses.

Current estimates for Q4 GDP growth are around 11%. If those estimates become reality, that would make a new all-time high for GDP. This would make 2020 nominal GDP growth positive after all the pandemic scare. That would be quite remarkable. Real GDP growth would still be negative for the year since real GDP growth takes the nominal GDP growth rate and subtracts the rate of inflation. We’ll have to wait and see how it plays out.

Consumer Confidence

Consumer confidence disappointed, coming in at 88.6, which is down -7.8% from last month and almost near the low of 86.6 that came in the immediate aftermath of the COVID outbreak. There were a few silver linings:

“The percentage of consumers expecting business conditions will improve over the next six months increased from 26.5 percent to 29.0 percent, while those expecting business conditions will worsen decreased from 22.5 percent to 21.9 percent. The proportion expecting more jobs in the months ahead increased from 25.0 percent to 27.5 percent.”

Fiscal relief (and perhaps the vaccine) should provide some near term support, but this data point will need to be closely monitored. The consumer makes up a large part of the US economy and sentiment can become a self-fulfilling prophecy. If anything, this shows that many still aren’t benefiting from the economic recovery (K shaped recovery if you will).

New Home Sales

New home sales for November came in sharply lower at 841,000. Also, last month's number was revised lower, from 999,000 to 945,000. This represents an -11% decline from the prior month, but still +20.7% higher than last year. Homebuilders are clearly struggling to keep up with demand.

Summary: The Fed’s accommodative monetary policy continues to have long term bullish implications for stocks. The bar has been set so low that anything short of a double-dip recession could be sufficient. That being said, we are seeing softness in the forward EPS, small business and consumer sentiment, and other key economic data points. Expect a slowdown in Q1 (perhaps even slightly negative), although fiscal relief should help.

It’s another holiday-shortened week with no earnings and few economic data points other than weekly unemployment claims. Wishing everyone a happy new year. Rest up now because the next few weeks will be very busy!