QVMM - S&P 500 Earnings Yield Sinks To 2023 Low Of 5.01%

2023-12-15 20:15:00 ET

Summary

• All 11 of the SP 500 sectors are way overbought, with the lone exception of energy, which is moving from neutral to overbought.
• The S&P 500’s “earnings yield” (EY) will end the week near 5.01%, its lowest print since July 28th’s 5.03%.
• Q3 ’23’s bottom-up S&P 500 EPS estimate is now expected to grow just 4.7%, YoY, versus the 12.7% expected on 9/23/2.

Three aspects struck me Friday afternoon, December 15th, 2023, while looking at the IBES data by Refinitiv and dropping the S&P 500 earnings number into the spreadsheets:

• All 11 of the S&P 500 sectors are way overbought, with the lone exception of energy, which is moving from neutral to overbought.
• The S&P 500’s “earnings yield” ((EY)) will end the week near 5.01%, its lowest print since July 28th’s 5.03% and the lowest EY of the year if the S&P 500 remains near 4,706 today.
• Q3 ’23’s bottom-up S&P 500 EPS estimate is now expected to grow just 4.7%, YoY, versus the 12.7% expected on 9/23/23, and that’s a bigger decline than normal when looking at the quarterly estimate, i.e. 800 bps or a 66% decline. That decline – as FactSet has been writing about – is more severe than normal.

Q4 ’22 is an easier comp for the S&P 500 in terms of quarterly earnings, which we wrote about a few weeks ago. Q4 ’22 S&P 500 earnings were not very good.

The Treasury rally undoubtedly has investors spooked, but jobless claims near 200,000 again continue to indicate the job market is not seeing real signs of stress.

We won’t know what Q4 ’23 S&P 500 earnings actually look like until January 10th or so, when banks and financials start reporting.

S&P 500 data:

• The forward 4-quarter estimate (FFQE) this week is $235.77 vs. last week’s $236.26.
• The P/E on the forward estimate is just under 20x at 19.96, versus last week’s 19.5x PE.
• The S&P 500 earnings yield is at its lowest print of ’23 at 5.01%, a smidge lower than the 5.03% printed on July 28th, 2023.
• High yield and investment-grade credit spreads have improved substantially since early November ’23.
• That Q4 ’23 EPS estimate has been revised lower from $58 and change on 9/30/23, to $54 and change as of 12/15/23.
• The S&P 500 rose roughly 2% this week, the Nasdaq Composite roughly 2.5% and the AGG +1.8%.

Summary/Conclusion: Nike ( NKE ) and FedEx ( FDX ) as well as Accenture ( ACN ), and CarMax ( KMX ) report next week, so some would say investors will get insight into industrial (FDX), consumer spending, Nike and CarMax and technology spending i.e. consulting via Accenture ( ACN ).

This blog is particularly interested in Nike since it remains well below its late ’21 peak near $179, (first week of November ’21), and FedEx with new CEO Raj Subramaniam embarking on a corporate consolidation of FedEx’s 3 operating units into one, with the ultimate goal of improving margins, and getting that FDX operating margin back to 10%.

(When old FedEx saw a 10% operating margin, it meant the transport giant just had a great quarter. I’m hoping Raj will make a 10% operating margin commonplace for FedEx.)

The US Treasury market and the rapid decline in interest rates in the last 6 weeks could be a tell that the US economy is slowing much faster than the Fed officials have caught on to, and if that’s the case, then Q4 ’23 S&P 500 earnings probably will result in lower guidance for calendar ’24.

However, Fed funds rate reductions usually trumps the EPS decline. Liquidity trumps earnings, but if not, then the US economy has a major issue. (Read Part III of this blog’s “secular bull market” thoughts from this past week.)

None of this is advice or a recommendation. Investing can involve loss of principal. Past performance is no guarantee of future results. All S&P 500 EPS and revenue data is sourced from IBES data by Refinitiv.

Capital markets change quickly, for both the good and the bad, so use market volatility to gauge the comfort level with your portfolio and adjust accordingly.

Thanks for reading.

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