This whole process that the sell-side goes through each week to arrive at bottom-up and top-down estimates for the S&P 500 and then the expected growth rates by sector has been blown to bits by the COVID-19 scare and the shelter-in-place.
That being said, like driving a car through brutal “white-out” snowstorm, where you’ve slowed to 10 MPH on an expressway, it might be very difficult to see in front of you, but it’s still the best tool you have.
Here is what caught my eye this week:
The calendar 2020 EPS estimate for the S&P 500 has fallen from $177-$178 around late December 2019, early January 2020 to $141 today, and it’s still probably going lower since crude oil continues to drop.
In terms of the quarterly progression in bottom-up estimates, it sure looks like Q2 ’20 will be the bottom for the quarterly S&P 500 estimates as Q2 ’20 is sitting at $30 per share.
What’s more interesting for readers:
The forward 4-quarter estimate of $145.70, which measures from Q2 ’20 to Q1 ’21 is now $4.70 higher than the calendar 2020 EPS estimate which tells me that by Q1 ’20, the S&P 500 EPS will have returned to growth.
What I wouldn’t want to see
The 2019 final, actual, S&P 500 EPS was $162.93.
This spreadsheet of the calendar 2021 S&P 500 estimate has fallen over $20 since late January 2020.
I wouldn’t want to see this 2021 S&P 500 estimate fall much below the low $160s, which would mean 2 years of flat to negative growth for S&P 500 earnings.
S&P 500 earnings peaked in 2006 at $88.18 per share and it wasn’t until 2011 that the S&P 500 finally printed an annual EPS estimate above $88.18, printing $97.82.
Here is a quick look at the metrics:
- Fwd 4-qtr estimate: $145.70 vs. last week’s $152.60
- PE ratio: 19.7x
- Rate-of-change: -15.5% this week, vs. the -11% last week
- S&P 500 earnings yield: 5.07%
The rally in the S&P 500 and the plummeting forward earnings has brought the S&P 500 earnings yield back down towards 5%, too low in my opinion.
The rate of change in the black box of the forward estimate; I would like to see it start to decelerate.
Summary/conclusion: It’s pretty clear that Q2 ’20 is going to be the bottom for S&P 500 earnings, but it’s the rate or slope of the acceleration moving out of Q2 ’20 that will matter. The S&P 500 earnings yield near 5% is always a red flag, but the environment makes this metric less useful.
I’d like to see the rate of decline in the forward numbers start to slow and that may take a few more weeks.
More to come on sectors over the weekend.
Thanks for reading.
Take everything you read here with substantial skepticism given the environment.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.