Forward S&P 500 Earnings Still Moving The Right Direction

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The thought is to start this weekend’s S&P 500 earnings update with the y/y growth rates for Q3 ’20 through Q2 ’21:

Readers should note the improving growth rates in Q3 ’20, Q4 ’20 and Q1 ’21 EPS and the the minor improvements in the same quarter’s expected revenue growth.

Bank earnings this week undoubtedly helped the 3rd quarter EPS numbers, although the bank stocks and financials didn’t do much on the week. (I’m starting to think Jim “RevShark” Deporre over at RealMoney has the banks right – what a horribly frustrating trade.) A note out of Jefferies this week, noted that JPMorgan (NYSE:JPM) might be ready to repurchase stock in Q1 ’21. That ability is badly needed for the banks and Financials like Goldman Sachs (NYSE:GS), etc.

S&P 500‘s forward earnings curve:

Ignore the shaded area, that’s a snafu, but readers can look at the sequential and 4-week rates of change rows and see the estimates continue to progress nicely.

S&P 500 earnings data (by the numbers):

  • The forward 4-quarter estimate rose this week to $156.78 from $156.08 last week.
  • The forward PE ratio is 22x.
  • The forward S&P 500 earnings yield is 4.50%, still pretty low relative to the last 10 years.
  • The 2020-2021 “expected” average EPS growth over the next two years actually slipped to 3% this week, after a remarkable streak of 27 weeks averaging 4%.

Summary/conclusion: The regular pattern that’s been in place for S&P 500 earnings since last Spring remains in place, particularly the sequential increases in week-to-week estimates.

As talk of a Biden “Blue Wave” gains in the media (and very few in the media happen to mention that at this same point in October 2016; Hillary Clinton held a 14% lead over President Trump), readers should assume higher taxes will be the result of a Biden presidency and a Blue Senate.

The Vice Presidential debate crystalized that for me when Senator Harris said that the corporate tax rate would be raised, as would the personal income tax reductions and the cap gains tax cuts (all restored to prior levels).

There is always a difference between campaigning and governing, so we’ll see what Congress comes up with if the vote math works, but Biden has noted that a 28% corporate tax rate is a possibility, versus the 20%-21% today post TC&JA.

In terms of the current 2021 S&P 500 EPS estimate of $165.83, if President Biden gets his wish, that would likely ultimately bring the 2021 S&P 500 estimate back down to the low $150s, depending on what else happens around the effective tax rate for corporate America in 2021.

That’s my biggest worry for next year.

Thanks for reading. Take all the EPS data and the math and the extrapolations with a grain of salt. The current trend in S&P 500 estimates still tells me that it’s the President’s race to lose, but 2016’s surprise should be enough evidence for everyone to want to ignore the polls and just get out and vote.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.