S&P 500 Earnings Update

Summary

Earnings Scorecard: Of the 496 companies that have reported earnings to date for Q3 2013, 73% have reported earnings above the mean estimate and 52% have reported sales above the mean estimate.

Earnings Growth: The blended earnings growth rate for Q3 2013 is 3.5%. The Consumer Discretionary has the highest earnings growth rate for the quarter, while the Energy sector has the lowest earnings growth rate for the quarter.

Earnings Guidance: For Q4 2013, 92 companies have issued negative EPS guidance and 11 companies have issued positive EPS guidance.

Valuation: The current 12-month forward P/E ratio is 15.0. This P/E ratio is above the 10-year average of 14.0. See Factset.com chart below for historic view.

 

Are The Models Broken?

Recently I read an article about several investment firms that were making changes to their quantitative process for their models.  Just last month, GMO, a highly regarded investment institution, published a report noting changes they made to their quantitative model, which had stated the S&P 500 index is about 50% overvalued!  Even the popular firm Vanguard is launching a new Quantitative Strategy as part of their line up.

So why all of the changes?  Our guess is that there is a profound disconnect between current asset prices and economic fundamentals that has rendered the models useless.

A good deal of the disconnect seems to be with the decline of the U.S. dollar.  When the global currency system was established several decades ago with the U.S. dollar as the reserve currency, the US was more than 50% of the world's GDP.  It is now around half of that amount, causing their to be more dollars in the world then there is demand for them.  Also QE by the Fed has accelerated this process and threatens the long-term value of the dollar.  One has to wonder if the new models will be able to handle the disconnects that will likely manifest in an economic environment where monetary policy is not as accommodative.

We must also keep an eye on inflation versus deflation debate as the central banks around the globe face great challenges in resurrecting but containing inflation while making sure a deflationary spiral does not take hold.