S&P 500 Company’s Profit Grows at Record Pace
2023.02.05 07:01
S&P 500 Company’s Profit Grows at Record Pace
BudriganAnalytics – Twitter was the first medium to note that the corporate high-yield asset class rally on February 2, 2023, was the strongest day of spread narrowing since November 20.
This was confirmed by a friend of many years who has managed insurance and total-return money as well as corporate bond money for 35 years. He said that Thursday, February 2, 2023, was the 13th biggest “tightening” (spread tightening) day in the past ten years.
This is a different economic and earnings cycle, probably because of the pandemic.
This week, the following is how clients’ taxable high-yield performed:
- +92 bp’s on the week, to 4.77% from 3.86% last week;
- : +82 bp’s on the week to 4.26% from 3.45% last week;
- +65 bp’s on the week from 3.17% to 2.53% last week
The returns are YTD ’23 returns as of February 4, 23 and then February 7, 23.
The repercussions for the stock market are obvious: Since it indicates that the US credit markets are open and functioning, spread tightening over longer periods of time is a positive underlying condition for both the US stock market and bond markets as well as the US economy as a whole.
The fact of the matter is that the US economy continues to be in fairly good shape, even though the benchmark revisions muddled the January 23 numbers and we may see downward revisions in the months to come. this Friday released following the nonfarm payroll report, rose to 55 once more.
When the Services PMI came in much worse than expected at 45 on the day of the December 22 jobs report in early January, “the Street” thought that the US economy’s services sector was finally giving in to higher interest rates. Services is approximately 50 on average over the two months, and it is neither expanding nor contracting.
While I do believe that the “normalization” of S&P 500 earnings growth after 2020 and 2021 (post-pandemic), particularly within the tech sector, is a component of the current weakness, there is an “economic cyclicality” to the SP 500 earnings story. However, the SP 500 earnings are the fly in the ointment.
Data on SP 500 earnings:
This past week, the forward 4-quarter (FFQE) earnings estimate for the S&P 500 fell to $223.28 from $225.02 last week. This was the sharpest sequential decline since the last time big tech reported earnings in late October or early November 22.
The PE ratio was 18.5 times as of Friday, February 3’s close, compared to 18 times the previous week;
The S&P 500 earnings yield decreased from 5.53 percent the previous week to 5.40 percent on September 30, 2222;
The bottom-up S&P 500 estimate for Q4 ’22 increased to $53.44 from $53.26 the week before. Even though forward estimates are still under pressure, that is a positive;
S&P 500 EPS Rate Of Change
The 2023 EPS estimate is being monitored as this block begins at the beginning of December 22. We wanted to keep an eye on the 12-week downward revision this week, but the full-year rate of change for 2023 is still not as severe as it was in late 2022.
However, I’d prefer to see those numbers rise rather than fall.
All of this comes with a caveat: Apple (NASDAQ:), NASDAQ: Amazon as well as Alphabet’s (NASDAQ🙂 NASDAQ:) Because the IBES data provided by Refinitiv cuts off the weekly data as of Thursday night’s market close, the data for the following week will reflect full estimate changes for the week ending February 3rd. Forward EPS changes are not included in the aforementioned data because they were reported after the close on Thursday, February 2nd.
Bottom-up, estimated quarterly EPS/revenue growth rates for the SP 500:
Current and anticipated bottom-up SP 500 EPS and revenue growth rates for Q4 of this year, the four quarters of 2023, and the first three quarters of 2024 are shown in the spreadsheet above. Refinitiv basically provides subscribers with a look at what is anticipated for SP 500 earnings over eight quarters.
- This past week, Q4’22 EPS and revenue growth were revised upwards;
- By quarter, 2023 shows weaker numbers until Q4 of that year, when EPS growth of high single digits is expected (as of this week);
- Although it is still early, the initial expectations for SP 500 EPS and revenue estimates for 2024 indicate that a stronger year is on the way;
The only reason this data is displayed is to force you to examine SP 500 EPS and revenue data over a variety of time periods.
If the SP 500 is a discounting mechanism that looks 12 to 15 months ahead, then market prices and levels should realistically assume that early 2024 are taken into account.
There is typically a discount factor in the SP 500 quarterly results that generates the “upside surprise” that the media talks about because of the inherent pessimism in the stock market, both on the part of corporate management and investors. Since Q1 and Q2 of this year generated well-above-average “upside surprise” or beat rates of 22% and 15%, respectively, in SP 500 EPS and 4% and 5.2%, respectively, in SP 500 revenue, the upside surprise or beat rate has decreased in late 2021 and early 2022.
In Q3 of this year, the SP 500’s EPS and revenue were both 5.5% and 2.3% higher than expected.
After the pandemic, the expected SP 500 EPS and revenue growth rates have returned to normal, but it has taken eight to ten quarters for this to happen.
Looking at the numbers from Goldman Sachs or JP Morgan’s corporate and investment bank in 2022, FICC (fixed-income, currency, and commodities) and stock and bond underwriting were terrible. However, developments this past week and so far in 2023 (after five weeks) indicate that the bond markets are opening up for the first time in a year.
In terms of the still-pervasive negative market sentiment and skepticism, as well as the persistent concern about a recession following the worst bond market ever in 1994, it feels like 1995. Funny thing is that Barclay’s Aggregate fell just 2% for the entire year in 1994, whereas the AGG fell 13% in 2022.)
The punk SP 500’s earnings and guidance are cause for concern, but the improvement in corporate spreads, particularly in high-yield stocks, is undoubtedly an overlooked positive.
Look at the daily change in corporate high-yield ETFs like the HYG (of which clients are long) and the if readers, investors, or concerned individuals observe a day like Monday this past week, when the SP 500 fell 1.2% and the fell 2%. Compare changes over time at different rates.
Watching the trade down to 55 basis points in August 2020, just prior to the Jackson Hole conference, felt like a life that had come full circle for someone who was studying money and banking in the fall of 1980 at a small school (the course was taught by a local Federal Reserve manager), Volcker was sending the fed funds rate to 20%, and the 30-year Treasury hit 15% that fall.
The point is that from 2008 to 2016, many US businesses refinanced debt at very low nominal rates and tighter credit spreads than in the previous 30 years. The market for single-family mortgages is the same as well.
The data from the Fed show that household balance sheets are still in good shape, probably as a result of the wave of refinancings in 2020, 2021, and early 2022, which reduced the cost of mortgage payments.
Because it is only one person’s opinion, you should view everything with considerable skepticism. There is no guarantee of future performance.
The earnings data comes from IBES data provided by Refinitiv; however, the calculations and measurements are solely my responsibility for this blog, so any errors are my own. Assess your own risk-to-reward ratio because capital markets can change rapidly, both positively and negatively.
