EC Earnings Update & November Review

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The forward looking Earnings Per Share for all S&P 500 companies combined increased last week from $160.08 to $160.40. 99% of the index have now reported Q3 earnings, with 84% of companies reporting earnings above expectations, and 78% of companies reporting revenues above expectations. In the aggregate, companies are reporting earnings 19.7% above estimates.

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The S&P 500 increased 1.67% last week. Since the index increased more than the forward EPS, the price to earnings ratio increased from 22.7 to 23.1.

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The 10 year treasury bond rate increased last week from 0.842% to 0.969%. A break above 0.957% would target the levels highlighted on the above chart, perhaps into the 1.3% to 1.4% range. After all this time, I still can’t believe we are talking about a move up to 1.0% on the 10 year as being a big deal. Crazy times!

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As a result, the yield curve (difference between rates on 2 year treasury bonds and 10 year treasury bonds) increased to a 2 year high, at almost 80 basis points. This is good for financials.

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The earnings yield on the S&P 500 fell from 4.40% to 4.34%, while the 10 year treasury bond rate increased to 0.969%. This reduced the equity risk premium from 3.56% to 3.37%. A higher equity risk premium means stocks are more attractive than fixed income alternatives on a valuation basis. The gap narrowed a tiny bit, but still nothing of meaning.

Economic Data Week in Review

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Last week the ISM Manufacturing PMI came in at 57.9, while the ISM Services PMI came in at 55.9. Both numbers are indicative of solid economic growth (anything about 50 is expansionary), but at a moderated pace from the prior month.

My weighted ISM (taking into account the weights manufacturing & services have in the US economy) dipped from 57.3 to 56.3. Still well in expansionary territory, but some softness was to be expected given the implementation of moderate restrictions.

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