S&P 500 Earnings Update

The S&P 500 earnings per share (EPS) increased to $199.63 this week. The forward EPS is now +25.5% year-to-date. Q2 earnings have only just begun (with only 3.6% of the index reported so far), but the beat rate remains very strong (89%) and results have come in a combined +15.3% above estimates.

The S&P 500 index finished the week +0.40% higher, for another record. The S&P 500 has now increased +99.35% off the March 2020 lows.

The S&P 500 price to earnings (PE) ratio is now at 21.9.

The S&P 500 earnings yield is now 4.57%, compared to the 10-year Treasury rate which declined to 1.35%.

Economic Data Review

ISM Services – Purchasing Managers Index (PMI) for June came in at 60.1. The Services PMI is a survey of about 300 non-manufacturing purchasing managers which asks respondents to rate the relative level of business conditions including employment, production, new orders, prices, supplier deliveries, and inventories. It is seen as a leading economic indicator.

A reading above 50 indicates expansion, so June’s reading makes the thirteenth straight month of Services sector expansion (roughly 75% of the US economy), albeit at a moderately slower pace than the prior few months.

Prices paid by service organizations for materials and services came in at 79.5, which was a slight decrease from the prior month (80.6), but still well above average.

My weighted ISM index (which takes into account how much the services & manufacturing sectors comprise in today’s economy) comes in at 60.2, down from 63.3 last month, but still well in expansion territory.

Chart of the Week

In the earnings update I always focus on forward earnings, which means the earnings projections for the next 12 months. Why do I do this? Simple, when you buy stock in a company, you are buying a stake in that company's future earnings. Past performance means nothing in that regard (although a solid track record is very important), it's a “what have you done for me lately” endeavor.

There is another type of earnings data point called “trailing twelve months,” or TTM, which is the total reported earnings over the last four quarters at any given point in time. Some very smart investors prefer to use this data point instead of forward estimates because it is tangible as opposed to a projection.

It’s a valid argument, but here are my thoughts. Forward earnings projections are usually pretty close to what companies actually report over time. The only time there is a major difference is during economic recessions. That’s when you see companies report earnings much lower than the projections. That’s why we review all the key economic data to estimate the likelihood of recession. If recession odds are low, then forward estimates are usually quite reliable.

The other argument is that forward earnings are always too optimistic. Well, over the last four quarters, 80%+ of companies have beaten earnings estimates handily. So if anything, the forward estimates may not be optimistic enough.

The trailing twelve month (TTM) EPS for the S&P 500 far surpassed the prior highs last week. So no matter which way you look at it (trailing, forward, or NIPA corporate profits), earnings have never been better.

Summary

It was another slow holiday-shortened week with little market moving earnings and economic data. That will change next week, as Q2 earnings officially kick off along with plenty of economic data.

The CPI inflation report on Tuesday will be especially relevant. If by chance the Core CPI increases above last month's 3.8%, the initial reaction probably won’t be good. I’m expecting the CPI to moderate from last month, but remain above average.

The good news is that interest rates have been little effected by the inflation scare. After topping out at 1.77% in March, rates have been on the decline. There may be some support around the 1.26% area, which coincides with a major swing high from last year. That level was hit on Thursday, and Friday saw rates move higher. Lets see if there is any follow through next week.

The fundamentals continue to be supportive of risk assets, but the S&P 500 has doubled from the March 2020 lows. The market continues to defy even my own bullish estimates. Don’t take on more risk than you can handle.

Next Week

For economic data we have NFIB small business optimism index and the Consumer Price Index (CPI) inflation report on Tuesday, the Producer Price Index (PPI) on Wednesday, Industrial production on Thursday, and retail sales on Friday.

22 S&P 500 companies will report Q2 results next week. I’ll be paying attention to JP Morgan (JPM) on Tuesday, Blackrock (BLK) on Wednesday, & Taiwan Semi (TSM), UnitedHealth Group (UNH), and Cintas (CTAS) on Thursday.