S&P 500 Macro Earnings Update - Markets Pull Back

Published on May 3, 2017 @ 4:00am

We've got a little weakness to kick off trading today following Apple's numbers last evening, which were actually pretty solid. However, the S&P 500's top performer so far this year is giving back a little ground on the day so far. All pretty orderly at this point - with the ongoing possibility of further weakness developing over the next several days.

We've lightened the load tremendously in recent days, and even though some of those ideas we took profits on Friday were up even more over the last few days, hindsight is always 20/20. There's no question these markets have gotten extremely extended without any sort of pullback along the way, so at this point we've adopted more of the "it's better to be out wishing we were in than in wishing we were out" mentality.

The bottom line is we'll see how it all plays out for May, but the good news is we've got a number of attractive ideas we like for the long haul. Basically, we're playing a little game of patience right now to see if these markets want to come off a bit, because if they do, we're likely going to get better entry levels in the ideas we like.

The daily chart of the S&P 500 below does look a little suspect right now. However, from a purely fundamental perspective, the entire earnings landscape should continue to drive the markets higher on a long-term basis, despite interest rates rising.

Even just this quarter so far - 57% of companies have reported their quarterly earnings, 75% of them have beat estimates, while only 16% of them have missed. That's extremely bullish - a theme that's likely to continue.

Trailing P/E right now for the S&P 500 are right around 25, which historically is a bit on the high side, but when you look at projections all the way out to 2018, the P/E is projected to go sub 20, which hasn't happened since 2014. That's pretty good bottom line growth between here and there, as well as a very attractive earnings backdrop to support higher levels across all of the major indices.

Additionally, during the month of April, analysts lowered earnings estimates for companies in the S&P 500 for the second quarter. The Q2 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 0.7% (to $31.89 from $32.12) during this period. How significant is a 0.7% decline in the bottom-up EPS estimate during the first month of a quarter? How does this decrease compare to recent quarters?

During the past year (four quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 1.5%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.3%. During the past 10 years, (40 quarters), the average decline in the bottom-up EPS estimate during the first month of a quarter has been 2.5%. Thus, the decline in the bottom-up EPS estimate recorded during the first month of the second quarter was smaller than the one-year, five-year, and 10-year averages.

In fact, this marks the smallest decline in the bottom-up EPS estimate for the index for the first month of the quarter since Q2 2014 (-0.2%).

This all points to a very bullish landscape going forward, but one that's not likely to come with some technical hiccups along the way.

So, why does this make the daily chart of the S&P 500 so interesting on a short-term basis right now? See how the index can't seem to get out of its own way over the last six days or so? That happened while Amazon, GOOGL and other big bellwethers reported absolute blowout quarterly numbers.

This suggests to us that from a fundamental perspective right now things remain good, but from a technical perspective things have gotten a little ahead of themselves. However, that's all normal - the markets love to trade well in advance of both positive and negative landscapes.

Basically, there's no reason to be running for the hills on a very long-term basis, but if we're going to squeeze as much as we can out of bullish ideas over the near-term, we do believe we could see lower levels soon.