S&P 500 Earnings Update & Economic Data Review - How Stocks Perform When Rates Rise Sharply

 

The earnings per share (EPS) for all S&P 500 (SPX) companies combined increased to $174.19 this week. The forward EPS has grown 9.54% so far this year.

95.8% of S&P 500 companies have now reported Q4 results, 80% of those companies have beaten expectations and earnings have come in a combined 16.5% above estimates. (I/B/E/S data from Refinitiv)

The S&P 500 declined -2.45% for the week.

The increase in EPS along with the decline in the S&P 500 pushes the price to earnings (PE) ratio down to 21.9

The big news was the move in rates. The 10 year treasury bond rate blew threw resistance levels with ease this week, settling back above pre-COVID range.

While the 10 year treasury bond rate increased about 11 basis points (to 1.46%) this week, the earnings yield on the S&P 500 actually increased 12 basis points (to 4.57%).

The equity risk premium (earnings yield minus 10 year treasury rate) actually improved this week despite the sharp rise in rates, due to the increase in EPS and decline in price.

Economic data review

The Conference Board’s Leading Economic Indicators (LEI) came in at 110.3 for January. An increase of +0.55% over Decembers number which was revised to 109.7. Per the CB:

“While the pace of increase in the U.S. LEI has slowed since mid-2020, January’s gains were broad-based and suggest economic growth should improve gradually over the first half of 2021,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “As the vaccination campaign against COVID-19 accelerates, labor markets and overall growth are likely to continue improving through the rest of this year as well. The Conference Board now expects the U.S. economy to expand by 4.4
percent in 2021, after a 3.5 percent contraction in 2020.”

Should the economy actually expand 4.4% in 2021, that would be the highest annual growth rate since 1999 (+4.8%).

Consumer confidence for February came in at 91.3, slightly above expectations and an increase of +2.7% above January (which was revised down from 89.3 to 88.9). Still, the index is down 33% below the July 2019 all time high and down 31% year over year.

The present situation index – based on consumers assessment of current business and labor market conditions – increased 7.6% for the month, while the expectations index – based on consumers short term outlook for income, business, and labor market conditions – showed a modest decline of 0.44%.

“After three months of consecutive declines in the Present Situation Index, consumers’ assessment of current conditions improved in February,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “This course reversal suggests economic growth has not slowed further. While the Expectations Index fell marginally in February, consumers remain cautiously optimistic, on the whole, about the outlook for the coming months. Notably, vacation intentions—particularly, plans to travel outside the U.S. and via air—saw an uptick this month, and are poised to improve further as vaccination efforts expand.”

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