SCHX - S&P 500 Not A Value Into Earnings Season Monitoring Trends In SCHX

2023-04-17 16:39:03 ET

Summary

• The US stock market is trading at lofty valuation levels on many metrics ahead of Q1 earnings season.
• So long as bottom-line growth holds up among the mega-caps, the high-teens P/E can hold.
• Still, I see domestic large caps as a hold right now based on fair valuation.

The first quarter earnings season is off to a decent start. In fact, the 90% EPS beat rate with 6% of SPX firms reporting is the best week 1 of earnings season in more than a decade. This is all child’s play, though, as most of the market’s size reports in the coming three weeks. What’s more, stocks have been bid like we have rarely seen in the month leading up to earnings season.

So, equities have a lot to live up to. In this market update, I will profile the Schwab U.S. large-cap ETF (SCHX) which closely tracks the performance of the domestic stock market. With Treasury rates back above 4% on the short-end of the curve, I see equities as priced no better than fair value today.

Big Early EPS Beat Rate

S&P 500 Up Big Heading Into Reporting Season

According to the issuer, the Schwab U.S. Large-Cap ETF tracks as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index. It is a straightforward, low-cost ETF offering potential tax efficiency.

It differs from both S&P 500 ETFs and Total Market funds in that SCHX holds the 750 largest U.S. companies as ranked by full market capitalization. It’s a useful fund for a long-term holding in a taxable account, in my opinion, considering its tax efficiency and low 0.03% annual expense ratio.

SCHX has total assets under management of more than $31 billion and yields just 1.58%. With low 3.75% annual turnover, tax risk is low while a low 30-day median bid/ask spread of just two basis points, indicative of robust tradeability.

The market is priced at nearly 19x forward earnings, which many investors deem to be expensive, but the largest holdings in the market also feature high and somewhat stable growth, so a valuation premium to domestic small and mid-sized companies is warranted in my view.

SCHX: Priced Near 19x Forward Earnings

SPX Pricey, But Perhaps Not Considering Growth Among Top Weights

I took a different approach with the seasonality of SCHX. Since it moves so closely with the broad US stock market, I recalled a chart from Callum Thomas at Top Down Charts . Notice in the graph below that the third year of a presidential cycle is often a bullish stretch – which most folks know by now. But the curveball is that when the SPX is in a bear market, the penultimate year of a Presidential term is not so great.

Equities often top around mid-April during downtrends while bull markets follow the well-known trend. The big question is whether stocks are in a bull or bear right now – in my view, until we make new highs, since stocks had eclipsed the 20% drawdown level, I see the total US stock market as in a bear.

A Twist On Positive Seasonality

The Technical Take

Much has been made of the 3800 to 4200 range on the S&P 500 over the last few months. But the chart below illustrates that equities have indeed been registering higher highs and higher lows off the October 12 low. On SCHX, that translates to resistance around $49 with support in the mid-$40s. In my technical opinion, so long as higher highs and lows are made, then the more likely it is that the mid-October was the bottom.

A concern in the near term that I have right now is that the RSI momentum in the market notched a lower low at the March nadir – it is thought that momentum usually precedes price, so this is a key risk to watch. Overall, the chart appears constructive and is following the bullish election cycle trend despite equities being well under the early 2022 all-time high.

SCHX: Building An Uptrend

The Bottom Line

I am a hold on SCHX for now. I like the low cost and tradeability, but the earnings multiple on US large-cap stocks is elevated even considering the earnings growth rate. I would be more constructive on SCHX at a lower valuation but also recognize that an uptrend remains in play so long as higher highs and higher lows are made off the October 12 bottom.

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