EPS

The S&P 500 posted a 7.7% price gain for the six months ended April 30^th, although this advance has been a hard-fought battle as gains have resulted from a narrow list of drivers. Style leadership has been concentrated in mega-cap tech names, such that the ten members of the NYSE FANG+^® Index have produced 77% of the S&P 500’s YTD gain. Furthermore, gains over recent months have resulted solely from expanding multiples. Narrowness in either thematic leadership or price drivers is concerning because breadth is a useful concept in evaluating the staying power of a market advance. In light of this year’s market action, we are intrigued by the notion of measuring breadth not simply by price moves alone but by examining each of these two important sub-components individually. Does today’s environment, where price gains are driven by valuation increases alone, tell us anything about future market returns?

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The S&P 500 posted an encouraging +9.2% YTD, but below the surface that strong return was the result of a limited number of influences. There is narrowness in both thematic and return drivers; the fact that gains have not been broad-based is cause for concern about performance during the remainder of 2023.

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If earnings’ nearly vertical ascent continues for another six months, 12-month trailing EPS will intersect the 6.9% long-term-growth trend line connecting the five major EPS peaks between 1974 and 2007. The “New Normal” has given way to the “Good Ol’ Days!”

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If there is one thing sure to make equity investors swoon, it is the prospect of buying into a credible, long-lived secular growth story at a relatively modest valuation. Over the past three decades, Emerging Markets (EM) have proffered just such an opportunity. EM’s economic growth rates have far surpassed those of developed nations, and the valuations attached to EM stocks have often been at a discount to other markets.

However, this combination of secular growth and attractive valuations has not always paid off for investors. The MSCI Index has underperformed the U.S., Europe, and even Japan over the last ten years in local currencies. Furthermore, EPS growth for the EM Index has come in far below its economic growth rate, creating an exasperating drag on Index performance as it tries to keep up with other regions.

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Analysts at Standard & Poor’s will soon confirm what’s been known for several months: The earnings downturn associated with the COVID recession was the shallowest and shortest of any recession-related EPS decline.

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Investors view Emerging Markets (EM) as the best source of economic growth across global equity markets, and rightly so. Annualized EM GDP growth of 8.6% since 2001 is more than double that of the U.S. and Europe. However, investors have not captured this extraordinary advance because earnings per share for the MSCI EM Index have lagged far behind EM economic growth rates.

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In a couple of weeks, final second quarter EPS for the S&P 500 will confirm the fastest recovery ever from a recession-related earnings decline. That’s old news, and before it has even hit the tape. But we’ve had a sneak peak from the monthly, 12-month trailing EPS numbers published by MSCI for its USA Large Cap Index. Those figures showed that EPS exceeded their pre-COVID peak in May, and the latest reading (through August) is already 22% above the prior high! Simple trendline analysis suggests that EPS for U.S. Large Caps are likely higher today than they would have been in the absence of the COVID pandemic and hyper-stimulative response. 

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If you want to see a rocket ship, there’s no need to crane your neck upwards to see the latest exploits of our billionaire space cowboys. Rather, look to our earnings glidepath chart and marvel at the contrails of the 2021 full year operating earnings for the S&P 500.  

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The bull market of 2009-2020 is no longer. But its spirit—its leadership—has somehow lingered, right through the worst of the decline and during the eleven-day, +19% S&P 500 bounce that followed.

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The approach of Halloween brings thoughts of jack-o-lanterns, scary movies, and buckets full of candy. The season also marks the time when investors finally give up the ghost on the optimistic, even wishful, earnings forecasts made early in the year.

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The Major Trend Index has remained in neutral territory during the last several weeks of upside action, suggesting there remain significant fundamental and technical shortcomings beneath it all. But this precarious MTI stance didn’t preclude us from acting on a new bullish reading for Emerging Market equities at the end of April.
 

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The S&P 500 finally erased the losses from its nine-day swoon in January and February.

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Whatever one’s philosophical leaning, the practice of adjusting earnings has left investors with too many watches to consult. We look deeper into the topic of adjusted earnings to gauge the slippage between commonly-referenced earnings clocks.

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Yesterday was the six-month anniversary of the S&P 500 bull market high, and the index celebrated the event by nearly setting a new peak. Meanwhile, the S&P 500 Total Return Index did make a new high on Wednesday.

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Given our money management mantra of “making it and keeping it,” we can’t imagine we’ll ever get comfortable with crypto-currencies.

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Buying the S&P 500 on one of the worst possible days in history ultimately yielded a total return of +87.4% (+6.8% annualized) through the end of April 2017...darn, sounds like an advert for Vanguard!

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The distinction between reported GAAP earnings and adjusted operating earnings has long been a source of debate among fundamental investors, and the choice of “E” will materially impact each investor’s view of the market’s P/E ratio.

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The S&P 500 trailing P/E has just climbed above 25x—lower than in March 2009—but incredibly high for any period in which earnings weren’t tainted by recession.

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Scott Opsal’s “Chart of the Week” in mid-October suggested the seven-quarter S&P 500 earnings recession may have run its course.

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Early in the third quarter earnings season, S&P 500 companies are providing a glimmer of hope that the long earnings recession may be ending. 

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